VALUE AND DISTRIBUTION 



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Value and Distribution 



A CRITICAL AND CONSTRUCTIVE 
STUDY 



By 

HERBERT JOSEPH DAVENPORT 

Associate Professor of Political Economy 
The University of Chicago 



CHICAGO 

THE UNIVERSITY OF CHICAGO PRESS 

1908 






'■i^'l.,. 



Two Copies rttxei-^. j 

FEB 20 iy08 



Copyright 1907 Bv 
The University of Chicago 



Published February 1908 



Composed and Printed By 

The University of Chicago Press 

Chicago, Illinois, U. S. A. 



To J. Laurence Laughlin: 

In a field so controversial as this of value doctrine, 
identity of interest is no pledge of agreement ; much, there- 
fore, in the following pages must fail to command your 
acquiescence. Nevertheless, I venture to hold you in some 
sort responsible for the existence of this book, by virtue of 
the very fact that it has been only through the freedom 
of thought and of teaching which you have fostered that it 
has been made possible. 

The Author 



PREFACE 

Were it ever important to decide in what degree, if at 
all, a writer may claim priority in the development of doc- 
trine, the task would be a peculiarly difficult one in the case 
of the present book. The truth, however, rather than any 
personal ascription of it being the important matter, it 
becomes worth while to reflect that for several decades and, 
indeed, in the main since the time of Adam Smith, economic 
theory has been in possession of doctrines enough for a 
reasonably complete, consistent, and logical system of 
thought — if only these doctrines had been, with a wise 
eclecticism, properly combined and articulated. 

The emphasis in the present volume upon the entre- 
preneur point of view in the computation of costs and in 
the analysis of the process by which distributive shares are 
assigned, has nothing new in it; it was necessary only that 
the point of view be clearly distinguished, consistently held, 
and fully developed. 

The present writer has emphasized opportunity cost; 
but this doctrine is everywhere implied in economic dis- 
cussion; the marvel is that it has been there only uncon- 
sciously or half consciously. As far as the present writer is 
informed, D. I. Green was the first to formulate the doc- 
trine in entire definiteness — the present writer the first to 
give it systematic application. 

To making precise the concept of profit and to elucidat- 
ing the relations of profit to cost some contribution has 
perhaps been made in the present book. 

The insistence that rent is a part of cost of production, 
in full parallel with other outlays, follows necessarily from 
the acceptance of the entrepreneur point of view; the doc- 
trine is as old as entrepreneurship. Nor is it new in 
economic discussion; political economy began there, but 



viii PREFACE 

wandered afield in search of labor determinants of value 
and of labor standards of value measurement. Cannan has 
perhaps best led in the return to the better way. 

The cancellation of the distinction between value-deter- 
mined and value-determining costs was inevitable when 
once this return was accomplished. 

Likewise there is little in the marginal analysis that can 
be offered as new; Ricardo applied it fractionally; the 
moderns have merel}^ extended the applications : it only 
remained to point out some aspects and limitations of its 
service. 

Precisely so of utility and of its modern refinements; 
but the relativity of utility on the demand side, and of cost 
on the supply side, of the market equation, has seemed in 
especial need of emphasis. But on the demand side all this 
was fully worked out by Marshall twenty years since. 

The competitive entrepreneur rendering of the capital 
concept was fairly well held as far back as the work of 
Say and of Malthus : Clark, Fisher, and Fetter have con- 
tributed greatly to the widening of the concept of capital 
socially considered; Cannan and Veblen to the individualis- 
tic emphasis : the elaboration of the loan- fund doctrine was 
perhaps left still to be done. 

Interest theory, in that formulation which, by title of 
adequate recognition, systematization, and development, 
Fetter has rightly made his own, is traceable at least as far 
back as Say; was adequately formulated — but the result of 
it unseen — by Wieser and by Clark, and was by the latter 
valiantly battled for. But, as it seems to the present writer, 
the relations of concrete productivity to time discount are 
impossible of explanation otherwise than with the accept- 
ance of the competitive rendering of the capital concept, 
and with the recognition of the loan- fund subdivision of 
competitive capital. 

Something also has perhaps been accomplished in these 
pages toward the elucidation, for working purposes, of the 
distinction between the primary and the secondary dis- 



PREFACE IX 

tributive processes and of their interactions ; nothing very 
serious appears to be the matter with present society from 
the point of view purely of the traditional production dis- 
tribution; the difficulties mostly relate to the secondary 
process. 

Evidently, then, if anything worth the doing has been 
accomplished here, any implication of which the author 
would disclaim further than is inevitably implied in getting 
oneself published, this cannot be so much in any contribu- 
tion of new doctrine as in the selection, delimitation, and 
articulation of the old. To this end the necessary thing 
has, in the main, seemed to be to rid the science of doctrines 
that do not belong in it, e. g., labor-time, labor-pain, utility, 
and marginal-utility determinants or measures of value; 
real costs; marginal fixation of price or of distributive 
shares; price-determined and price-determining costs or 
distributive shares; instrument margins; marginal-produc- 
tivity distribution; price measures of utility; the social 
organism; fundings of productive agents; the tripartite 
classification of productive factors. 

And if all, or any considerable part of this, has really 
been accomplished, it is enough. 

Chicago, August io, 1907 



TABLE OF CONTENTS 

CHAPTER PAGE 

I. Vamous Cost Concepts i 

II. Adah Smith 8 

III. RiCARDO 29 

rv. Senior : . 44 

V. John Stuart Mill 53 

VI. Cairnes 62 

VII. Further Cost Doctrines 84 

VIII. Profit Depined: Profit and Risk as Related to 

Cost . 94 

IX. Early Utility Theory: Say 107 

X. The Capital Concept 121 

XI. Capital as a Competitive Concept . . . . 141 
XII. Competitive Savings and Social Capital: Loan 

Fund and Abstract Capital 157 

XIII. The Standard of Deferred Payments . . . 175 

XIV. Interest 189 

XV. Interest — Concluded 217 

XVI. Rent and Cost — Marginal Cost — Relative Cost 262 

XVII. The Modern Movement 296 

XVIII. Classical vs. Modern 334 

XIX. The Positive Theory and Natural Value . . . 353 

XX. The Attempt at Reconciliation: Marshall . 372 

XXI. The Attempt at Reconstruction: Hobson . . 405 

XXII. Distribution by Value Productivity: Clark . 439 

XXIII. The Laws of Return 480 

XXrV. The Dynamics of Value and Distribution . . 512 

XXV. The Adjustment of Price 53^ 

XXVI. Distribution 554 

XXVII. Summary of Doctrine 569 

Index 577 



CHAPTER I 
VARIOUS COST CONCEPTS 
The scientific development of economic theory began 
with the attempt to solve the value problem. Almost all 
early doctrine was cost doctrine in some one or other of its 
protean aspects. With the earlier writers of the classical 
school, cost was prevailingly interpreted in terms of labor; 
but in the detailed working-out of ^the value problem and 
of its further development, the notion of cost came to be 
presented in practically all of its different and conflicting 
senses. A brief analysis of the various ways in which the 
cost concept was employed in classical discussion will, then, 
afford a serviceable introduction to the value problem. The 
work of Adam Smith will be found surpassingly well 
adapted to the purposes of this analysis. 

Labor-purchase cost. — The doctrine of the earlier 
economists that labor is the original source of value con- 
tained, even at that time, nothing especially novel or 
recondite ; so much had been announced long aforetime and 
upon very excellent authority: "In the sweat of thy brow 
shalt thou eat bread." He that will not work neither shall 
he eat. Labor and the hire of labor appear both ideally 
and practically to have an intimate association. What one 
gains at fishing or hunting depends mostly or largely on the 
quality and zeal of the quest. Give Crusoe his island, and 
what he will get from it will depend upon the sort of 
person that Crusoe is — his industry and intelligence, in 
short, the quality of his work. Set a group of colonists 
upon its newly found island or continent ; what gets accom- 
plished there, the results achieved, the well-being attained, 
will depend upon the more or less of productive effort 
applied. Product is readily thought ©f as so much commod- 
ity purchased at the price of effort, a primitive transaction 



2 VALUE AND DISTRIBUTION 

in exchange — in the long run also, a method espe- 
cially satisfactory in character and naive in its simplicity of 
justice, where deserving and receiving tend to fall out in 
strict proportion. At any rate, such is the gist of the doc- 
trine stated by Adam Smith: "The annual labor of every 
nation is the fund which originally supplies it with all the 
necessaries and conveniences of life." Therefore, accord- 
ingly as this output "bears a greater or smaller proportion 
to those who are to consume it," is the nation better or 
worse o&} 

Labor was the first price, the original purchase money, that 
was paid for all things. It was not by gold or by silver, but by 
labor that all the wealth of the world was originally purchased; 
and its value to those who possess it and who want to exchange 
it for someone's production is precisely equal to the quantity of 
labor which it can enable them to purchase or command.^ 

It must be noted, however, that his view of the case may 
be taken to express merely a social or collective aspect of 
the labor-value doctrine, the national income being regarded 
as the return upon the national productive energies applied 
as a unit to the national environment. The terms of pro- 
curement, the purchase outlays, are the efforts applied. 
This reasoning is equally applicable to a Crusoe economy ; 
the income, the wage, the remuneration, is obtained as a 
result of the labor put forth; nothing need be implied, 
possibly nothing can safely be deduced, as to the exchange 
relations to be established between different portions of the 
product obtained; but conceiving this product as a unit 
total, the labor stands as the cost with the product as the 
produced value. This may be termed the labor-purchase 
concept of cost. 

Labor-time cost. — But if a basic measurement of value 
and a method of comparison of different value items be 
sought, and if it be asked by what method, in this sense, is 
labor to be taken as cost, other notions emerge. Measure- 
ment by the hour or by the day lies most readily at 
hand. The isolated producer would find time the most 

^ Wealth of Nations, "Introduction." 
^ Ibid., chap. iv. 



VARIOUS COST CONCEPTS 3 

simple and practicable common denominator of costs. So a 
collectivist community, especially were it of a democratic 
habit of thought, would incline to apply the labor power at 
its disposal, and to distribute the product, according to 
units of time. 

Labor-pain cost. — But whether or not a collectivist 
society could practically do better than this, and whether 
for ordinary purposes Crusoe would attempt anything 
further, it is certain that in exceptional cases the isolated 
producer would add some modifications; the crude time 
reckoning would be amended to allow for considerations of 
especial hazard or severity or irksomeness. Combinations 
of the hazardous with the pleasant, e. g., the hunt as against 
the safe but tedious processes of agriculture, would inevi- 
tably present themselves. For, after all, the essential fact of 
time cost is not the time aspect pure and simple, but the 
burdensomeness involved or the disinclination overcome. 
As soon, therefore, as the concept of cost receives a more 
careful analysis, pain cost will, at least in the individual 
computation, be found fundamental to time cost. 

Put in other form, the form which, as we. shall see, 
Ricardo would have especially chosen, the notion would run 
something as follows : the purpose of productive activity is 
the attainment of the means of pleasure ; pain is the cost of 
getting pleasure and may therefore serve adequately to 
express the relative values of these pleasures obtained or of 
the facts or media through which the pleasures are 
obtained. And it is thus that Ricardo came to distinguish 
so sharply between riches and value; with riches the 
emphasis is upon utility ; with value it is upon cost.^ 

^ "Value depends .... on the difficulty or facility of production. 
The labor of a million men in manufactures will always produce the 

same value, but will not always produce the same riches A 

million of men may produce double or treble the amount of riches, of 
"necessaries, conveniences and amusements," in one state of society 
that they could produce in another, but they will not on that account 

add anything to value Riches do not depend on value." — 

Ricardo, Political Economy (Conner), chap. xx. 



4 VALUE AND DISTRIBUTION 

Labor-value cost. — But inasmuch as labor involves, or 
at all events commonly implies, some degree of pain, is it 
not logical to conceive of the attendant pain as the neces- 
sary condition to the existence of labor — the purchase 
price on terms of which one comes into possession of his 
own labor power? Just as, in getting control of the 
services of others' labor, one makes a sacrifice of purchasing 
power — good or money — precisely so one may be conceived 
to hire or buy his own labor effectiveness on the terms and 
at the charge of the pain attendant upon labor. Based, 
therefore, upon its cost, it has been found possible to 
ascribe a value to labor itself irrespective of the value of the 
product, which basic value may be conceived as carried over 
to the commodity produced, and as incorporated as a cost 
therein, the value of the product being the incorporated 
labor value consumed in the process of production. Obvi- 
ously this view goes further than the labor-pain-cost 
theory: the labor-value-cost theory explains value not 
merely by the pain of labor but by ascribing to the labor 
itself, because of the pain, a value fundamental as cost to 
the value of the thing produced. 

Closely related to the foregoing, and with difficulty dis- 
tinguishable from it, is another concept of labor value: 
Life being essentially activity in conjunction with con- 
sciousness, and economic products being the concrete and 
objective resultant of this activity with its associated and 
attendant pain, labor appears to take on value by virtue of 
the fact that labor is the very expression and incorporation 
of life itself. Value in products is thus conceived as tracing 
back, through the value of labor as cost, to the thought 
of draft against life and of expenditure of life; product 
thereby bears value as the simplest case under the doctrine 
of costs. 

All of these computations of cost are, however, open to 
the objection that they are over-simple in the conditions 



VARIOUS COST CONCEPTS 5 

assumed: no provision is made for production under the 
capitalistic wage system ; on the contrary, each case is taken 
as one of independent production, of self -employment. A 
new classification of costs is therefore to be made, accord- 
ingly as the case is one of employer cost or of employee 
cost. The concept of labor-pain cost does not readily find 
place for itself under the system of entrepreneur produc- 
tion. Typically and at its simplest, employer cost is outlay 
cost; employee cost, on the other hand, must, if it apply 
at all, resolve itself into some one or other of the aspects of 
labor cost. 

But even for cases of independent production, the fore- 
going analysis fails of adequacy in omitting to take account 
of capital-use and instrument-use costs and of other 
charges not necessarily included under the head of outlays. 
What disposition shall, for instance, be made of the item of 
compensation for the time use of that part of the entre- 
preneur's circulating or floating capital employed as wage 
fund in the hiring of laborers ? Here, then, we have also a 
capital-use cost, whether this be regarded as risk cost or as 
interest cost or as a composite of both. 

But if, outside of risk and upkeep, a compensation is to 
be computed for the owner of saved wealth, upon what basis 
shall this computation be made? If the capitalist entrepre- 
neur is, so far as his capital is concerned, to be remunerated 
for the restraint implied in non-consumption, for the saving 
involved in capitalization, we arrive at the notion of absti- 
nence cost. If, however, the rewards are better figured 
upon the basis of what the capital might have earned if lent 
out, we must take account of a loan-interest-displacement 
or an investment-opportunity cost. 

And if, on the other hand, the capital charge, in the 
given employment, is to be rated at what the capitalist 
entrepreneur could have made the capital yield him in some 



6 VALUE AND DISTRIBUTION 

alternative productive use, we must make room for capital- 
product-opportunity cost. 

And bearing in mind that the entrepreneur might as 
employee have applied his personal powers on terms of 
salary or wages, or might under self -employment have 
applied himself to some other line of production, we are 
compelled to catalogue, as possible cost concepts, these 
further cases of personal-zvage-displacement and personal- 
product-displacement (opportunity) costs. 

And now under the general head of employer costs are 
to be catalogued some further concepts acceptable accord- 
ingly as cost notions have received modification through 
various theories regarding the determination of wages, 
rent, and interest. 

Wealth having been conceived as the product of labor, 
and capital as stored-up wealth devoted to further produc- 
tion, interest has sometimes been regarded as the indirect 
payment of wages; and the different notions of labor cost 
— time, pain, and value — have been employed as the ulti- 
mate explanation of interest, thus reducing it to the com- 
mon denominator of pain. 

But evidently there must cut across this line of analysis 
the distinction between employer cost and employee cost — 
that is, between cost to the borrower and cost to the lender. 
If interest is indeed wages in disguise, that which is time or 
pain or value cost to the producer of the capital must be 
outlay or investment-opportunity or product-opportunity 
cost to the borrower. 

In this last sense, also, there is room for argument for 
the establishment of an investment-opportunity or product- 
opportunity cost with reference to rent outlays; more than 
mere mention of this notion is, however, impracticable at 
this point in the discussion. 

So far as outlays in wages are concerned, it may be 
forcibly urged that cost-of -production influences underlie 



VARIOUS COST CONCEPTS 7 

and determine the wage level : to the extent, therefore, that 
labor is directly or indirectly the source of value, this view 
would make the subsistence-cost value of labor the deter- 
minant both of the labor value to the laborer and of the 
wage outlay to the employer. Under this head of subsist- 
ence-value cost would fall the two doctrines of standard- 
of-living-wage cost and minimum-of-existence-wage cost. 

Without venturing to assume that no other cost con- 
cepts can be recognized in classical discussion, it may be 
confidently asserted that all of the foregoing concepts are 
to be found therein. Nor is it at present attempted to make 
the catalogue of cost concepts and cost distinctions exhaust- 
ive. But it is especially necessary to call attention at this 
point to the distinction between individual (competitive) 
and social (collective) costs, as of fundamental and far- 
reaching significance. These concepts, while not readily 
presented at this time, will come in later for a deal of 
discussion. 



CHAPTER II 
ADAM SMITH 

After making it clear in his introductory chapter that 
the population of a country is better or worse off accord- 
ingly as the total product "bears a greater or smaller pro- 
portion to those who are to consume it/' Adam Smith goes 
on to assert that, for the most part, the average share of 
consumers must depend upon the skill and dexterity of the 
labor, but also, in some part, "on the proportion between 
the number of those employed in useful labor and of those 
who are not so employed. Whatever be the soil, climate, 
etc., the abundance or scarcity of its annual supply must, in 
that particular situation, depend upon these two circum- 
stances," And so, with any particular situation given or 
assumed, the labor of a nation "is the fund which originally 
supplies it with all the necessaries and the conveniences of 
life." This we have termed the labor-purchase doctrine of 
cost. 

But it is fair to say that Adam Smith does not, at this 
particular point, make much of this doctrine, or attempt to 
apply it as an explanation of the value relations between 
goods. But in chapter v the step is fully taken : 

Labor was the first price, the original purchase money that 
was paid for all things. It was .... by labor that all the wealth 
of the world was originally purchased; and its value to those .... 
who want to exchange it for some new productions, is precisely 
equal to the quantity of labor which it can enable them to purchase 
or command. 

It is, however, to be noted that the reasoning according 
to which labor is the first purchase price holds only when the 
"particular situation" is assumed; so much as this must be 
taken for granted as somehow given in the reckoning, a con- 
tinent, or island, or country, in which the labor is put forth ; 
and only such degree of "originality" in production can be 
imputed to the labor as may be worked out by regarding 
the situation, the habitat, as a passive rather than as an 

8 



ADAM SMITH 9 

active fact — as opportunity rather than as productive 
power. For whatever value there is in the distinction 
between condition and cause, the environment must, in this 
view, stand as the condition and labor as the cause. But 
none the less must the productive output differ with differ- 
ences in environmental opportunity; the terms of the 
exchange between man and nature must vary with the 
varying opportunities for production, labor having a greater 
or less producing power with the varying bounty or nig- 
gardliness of the environment. And so, while, socially 
speaking, the labor- fund-purchase idea is a cost doctrine 
of the labor sort, it is such by the very fact that it is social 
in character and treats the whole product as a unit pur- 
chased by the whole of the labor applied. But evidently, 
so far as the product is taken as a whole, as a. unit, and as 
set over against the total of labor producing it, no key is 
given to the exchange relations between different portions 
of this product. Even for the Crusoe case, his 
different units of effort could be represented in 
products of equal utility, only upon the assumption 
of absolute uniformity of advantages in the conditions 
of production, that is, upon the assumption of no extensive 
or intensive land differentials, and so of no law of diminish- 
ing returns of any sort. And likewise also, Crusoe himself 
must always remain at one level of vigor, alertness, and 
intelligence. That is to say, not merely homogeneity in 
environmental conditions, but absolute homogeneity in 
labor quality must be assumed, in order that either for an 
individual or for society the labor-fund-purchase doctrine 
could, as a cost doctrine, be adapted for service either as a 
measure or as a determinant of exchange relations. And it 
may be remarked in passing and as awaiting a more exhaust- 
ive discussion later, that precisely the same defects inhere 
in all applications of labor time, labor pain, or labor value, 
as cost measures or as cost determinants, unless possibly as 
somehow worked out from the point of view of the employer 
rather than of the isolated or self-employed producer. 

And precisely this change in point of view is to be 
remarked in the chapter immediately following upon Smith's 
introduction. This is the chapter containing the famous 
pin illustration of the advantages of division of labor : per- 
haps, it is said, the larger application of this principle to 
manufactures explains the higher productivity of these as 



lo VALUE AND DISTRIBUTION 

against agriculture, and the greater opulence of advanced 
and manufacturing peoples as against backward and agri- 
cultural peoples. 

The most opulent nations, indeed, generally excel all their 
neighbors in agriculture as well as in manufacturing; but they are 
commonly more distinguished by their superiority in the latter 
than in the former. Their lands are in general better cultivated 
and, having more labor and expense bestowed on them, produce 
more in proportion to the extent and natural fertility of the 
ground. 

But oddly enough, Smith remarks, the products are not 
cheaper with these better methods and time-saving devices : 
despite the fact that corn lands are better cultivated in 
England than in France, and in France than in Poland, 
corn in Poland is as cheap as in France, and in France as 
in England: "This superiority of produce is seldom more 
than in proportion to the superiority of labor and expense." 
But note the phrase, "labor and expense." Does Smith 
mean more labor in point of time, or merely more expensive 
labor, labor paid on a higher wage level? Surely — ques- 
tions of density of population aside — it cannot be more 
labor in point of time. In fact, in view of the especially 
marked productiveness of manufacturing industries, it is 
only the choicer grades of land or of land power that can 
profitably be utilized; the return per unit of labor should 
thereby be of still more marked superiority. Thus, on any 
basis of labor cost in terms of time or of pain, lower rather 
than higher values must obtain. There is nothing for it 
but to shift the point of view to that of employer's outlay, — 
as Smith does, — to labor-value cost under competitive pro- 
duction, where labor value appears under the guise of wage 
payments commanded by labor as a productive fact. But 
note that, in this view, labor-value cost is not a pain or a 
life value, imposing as cost its value upon the product, but 
is merely the market value of labor as an agent of produc- 
tion. The case is more nearly one where the product is 
reflecting value back upon the labor agent. 



ADAM SMITH II 

And yet, if such is the case, it must be- difficult, as Smith 
sees, to explain the undoubted fact that agricultural prod- 
ucts bear often the higher price in the opulent country. 
The high value of the labor when employed in agriculture 
must find its explanation not merely in the high value of 
the agricultural product, but in the high productiveness of 
labor employed in manufactures. 

The labor of the rich country .... is never as much more 
productive (in agriculture) as it commonly is in manufac- 
tures The corn of the rich country, therefore, will not 

always come cheaper to market than that of the poor. 

The ultimate reasoning for all this is as follows : The 
high value productivity in manufactures necessitates that 
such agriculture as is followed should also be highly value 
productive; this high alternative productiveness imposes 
upon the employer a high wage outlay. Thus, in terms of 
employers' outlay, the higher "labor and expense" bestowed 
in the more opulent country affect the greater product to 
such a degree that the prices are often the higher in the 
opulent country. 

That Smith worked out fully all the steps of the argu- 
ment, or was conscious of all the implications of the situa- 
tion as he outlined it, is obviously not to be asserted ; but it is 
clear that he is within the field of competitive costs and of 
exchange values as distinguished from collective cost and 
social income. More than half consciously he is employing 
the notion of outlay cost; impliedly, but not consciously, he 
is making use of the principle of displacement-opportunity 
cost, in one of its most typical forms. He has, in truth, 
outlined a situation in which, as a question of labor invest- 
ment, or of social and collective efifort, labor-purchase cost, 
corn is cheap instead of dear, but where as a question of 
competitive cost it is, because of the displacement condi- 
tions, high in cost and dear in price and in exchange value. 

It is doubtless on some such basis as this that, after 
mentioning use value, he distinguishes between value in 
exchange and real value; by real value is meant labor- 
burden value as the norm of value, that value which traces 
back to the ultimate cost — the real price, the natural price — 



12 VALUE AND DISTRIBUTION 

a concept which seems to waver between the labor-purchase 
idea of cost and the labor-value idea. 

But later, in chapter v, there is a distinct enunciation of 
labor-pain cost, expressed as a value quantity, as the deter- 
minant of the real value of labor. Whatever difficulties 
market values may offer, Smith takes it as clear that, in the 
isolated economy, equal volumes of labor must always be of 
equal value to the laborer, because, possible variations in his 
personal equation aside, "he must always lay down the 
same portion of his ease, his liberty, and his happiness." 
One might suppose that with the assumption of a necessary 
uniformity of labor pain attendant upon equal quantities 
of labor, there is assumed a uniformity in opportunity and 
in product; such, however, is not the thought; no matter 
how great the volume of product in a day, the aggregate 
value will be invariable ; it is the commodity units that must 
do the varying, since "it is their value which varies, and 
not that of the labor which produced them." Labor is their 
real price and having in itself a value, it carries this value 
over to the product. Here there is a distinct announcement 
of the labor- value-cost doctrine, and an implied and uncon- 
scious, but equally distinct, repudiation of the doctrine of 
opportunity cost; that is to say, the real value of the 
product, being irrespective of the volume of it, must the 
more clearly be uninfluenced by any question of possible 
alternative product. 

In this fifth chapter, there is also some foreshadowing 
of the distinction between riches and value later made so 
prominent by Ricardo. Smith says that "every man is 
rich or poor according to the degree in which he can afford 
the necessaries, conveniences, and amusements of human 
life." Possibly he would himself have been puzzled to say 
whether the term "afford" implied the concept of fund or of 
flow, possessions or income ; but in any case, the thought of 
riches rests upon enjoyment utilities as the test. How- 
ever, he believes that inasmuch as under division of labor 
each man produces but the smallest part of what he con- 



ADAM SMITH 13 

sumes, obtaining through exchange the results of others' 
labor, one "must be rich or poor according to the quantity 
of labor which he can command." That is to say, the 
amount of necessaries, conveniences, and amusements is, 
after all, reducible to terms of command of labor — a labor- 
purchase rather than labor-origin basis for value. So the 
value of any commodity that one has produced to sell "is 
equal to the quantity of labor which it will enable him to 
purchase or command. Labor, therefore, is the real meas- 
ure of the exchange value of all commodities." 

Noting carefully that we are now arrived at a doctrine 
of exchange value and not of real value, the perplexity pre- 
sented by the very first line of the next paragraph will dis- 
appear ;the thought here reverts to the primary, the real-value 
concept: "The real price of everything, what every- 
thing really costs the man who wants to acquire it, is the 
toil and trouble of acquiring it" — labor cost of some sort: 
but "what everything is really worth to the man who has 
acquired it is the toil and trouble which it can save to him- 
self and which it can impose upon other people." 

Here is a definite enunciation of his antithesis of real 
price to exchange value. Real value is the labor it took; 
but when once you have the thing and are estimating the 
quantum of it as riches, its wealth to you as a salable thing, 
its utility in exchange, you look simply to the toil and 
trouble which you can make it shield you from by imposing 
this toil and trouble on someone else. When you command 
from another his money or his goods, you are, in final 
analysis, levying on his labor. "What is bought with money 
or with goods is purchased by labor, as much as what we 

acquire by the toil of our body These things contain 

the value of a certain quantity of labor which we exchange 
for what is supposed .... to contain the value of an 
equal quantity." 

Thus, so far as all this may be made consistent, it means 
that real price or real value is always the labor of attain- 
ment; but whether this labor is conceived as in itself a 



14 VALUE AND DISTRIBUTION 

value, or merely as burden, is not so clear. Exchange value 
is the labor that a thing will by sale protect the owner from, 
or that in purchase it will cost the buyer, in inducing him to 
let go of a product produced by his own labor. And thus 
exchange value seems to have a real and ultimate basis in 
real value. 

Sometimes also Smith seems to talk of a fourth sort of 
value, a value which covers the temporary disturbances and 
variations from exchange value. And it is added that 
"though labor be the real measure of exchangeable value of 
all commodities, it is not that by which their value is com- 
monly estimated." Labor is so different in intensity, skill, 
and direction, that it is not easy to find any accurate meas- 
ure; but a sort of rough equality in kind is worked out 
through the higgling and bargaining of the market. Popu- 
lar thought, however, does not make any recourse to labor 
as the measure, at least no conscious recourse ; most people 
can understand commodities, concrete palpable objects, but 
labor is "an abstract notion which, though it can be made 
sufficiently intelligible, is not altogether so natural and 
obvious." 

All of which seems to mean that, rightly understood, it 
is possible to reduce labor to a homogeneous fund. Of 
time? Evidently not. Of pain? This also will not serve 
Of value? But if this be a value dependent upon the 
product, and derived from the product, it is clear enough 
that homogeneity is attainable and is actually attained, but 
homogeneity only in terms of the very value that it is sum- 
moned to explain, a view which would, in the last analysis, 
conceive labor as receiving value rather than as determin- 
ing it. And upon the basis that labor derives its value from 
the value of the product, labor is not competent to give 
value, unless possibly through some opportunity-cost 
analysis, later to receive attention. 

And now we are called upon to note that Smith uses his 
labor doctrine or doctrines for three different purposes, 
purposes essentially distinct in nature, though almost hope- 
lessly confused in the course of his discussion. At one time 



ADAM SMITH I5 

labor is treated as the determinant source of all value, pre- 
cisely as, in the mechanical sense, it is the creative source 
of some commodity products. At another time attention 
is directed primarily or exclusively to the discovery of a 
medium of measure, a mode of expression, a common 
denominator, into which values may be resolved and by 
which they may be made homogeneous and comparable, a 
standard of value expression. Or, finally, the investiga- 
tion directs itself toward the discovery of a standard of 
deferred payments, a medium of comparison over wide 
intervals of time. 

Selecting the third of these aspects as first in the order 
of discussion, it would perhaps be fair that not much be 
expected from a writer of the eighteenth century, in view 
of the confusion of tongues lasting without amelioration 
well over into the twentieth. 

Proceeding from the general point of view of the doc- 
trine that labor is the source and the measure of value in 
ordinary relations, Smith declares for labor as the ideal 
standard of deferred payments. But since some concrete 
and tangible fact, in terms of which payment can readily 
be made, is regarded as desirable, Smith inclines to advise, 
for long-time purposes, corn, and, for short-time purposes, 
silver, as the standard commodity. 

Equal quantities of labor will at distant times be purchased 
more nearly with equal quantities of corn, the subsistence of the 
laborer, than with equal quantities of gold and silver, or perhaps 
with any other commodity. Equal quantities of corn, therefore, 
will, at different times, be more nearly of the same value, or enable 
the possessor to purchase or command more nearly the same 
quantity of the labor of other people.^ 

It is, indeed, true "that equal quantities of corn will not 
do it exactly," for standards of consumption vary; other 
commodities, however, hold command over labor by virtue 

^Adam Smith, Wealth of Nations, chap. v. 



1 6 VALUE AND DISTRIBUTION 

solely of their command over the subsistence of labor and 
in proportion thereto. Thus 

a rent reserved in corn is liable only to the variations in the 
quantity of labor which a certain quantity of corn can purchase. 
But a rent reserved in any other commodity is liable, not only to 
the variations in the quantity of labor which any particular quan- 
tity of corn can purchase, but to the variations in the quantity of 
corn which can be purchased by any particular quantity of that 
commodity f 

the dangers of departure from the labor standard are there- 
fore squared. 

Evidently this might do, if only it were safely to be 
assumed not only that all that laborers earn they spend in 
subsistence, but also that corn is the only subsistence com- 
modity; it would then be true that other commodities could 
command labor only in the measure that they were exchange- 
able for corn; corn would, then, fall short of an ideal labor 
standard only in the degree that the laborer's dole of corn 
were a varying one. 

At any rate, as Smith believes, since corn spells sub- 
sistence, corn must approximate more closely to the labor 
standard than would any other commodity. 

Nothing is made here of a doctrine of some currency 
later, that wages in terms of money must rise or fall with 
every rise or fall in the price of corn, to the result that the 
laborer's corn wages must remain a practicably unvarying 
quantity. It is, indeed, held that in short-time relations real 
wages in terms of command over subsistence necessities 
vary widely. "The subsistence of the laborer, or the real 
price of labor, as I shall endeavor to show hereafter, is 
very different upon different occasions ;" and so, while "the 
real value of a corn rent" — its labor significance — "varies 
much more from year to year" than that of a money rent, 

it varies much less from century to century But the value 

of silver, though it varies greatly from century to century, seldom 
varies much from year to year, but frequently continues the same, 
or very nearly the same, for half a century or a century 
together In the meantime the temporary and occasional 

^ Adam Smith, op. cit., chap. v. 



ADAM SMITH i? 

price of corn may frequently be double, one year, of what it had 
been the year before. 

Thus, in general purchasing power, as tested by the labor 
standard, "from year to year silver is a better measure than 
corn," while "from century to century corn is a better 
measure than silver." ^ 

But the attempt to find in labor a common denominator 
of value had this much at least in its favor — that if labor 
would not serve for the purpose, nothing else was at hand 

^Ibid., chap. v. 

This is not the place for an adequate discussion of the general 
problem of the standard of deferred payments ; little more, indeed, 
can be attempted here than to put in the interrogation points. It is, 
however, evident that Smith's reasoning assumes the long-time tend- 
ency of wages to approximate either to the subsistence-minimum 
requirement, or to the standard-of-living requirement. His argu- 
ment rests upon the assumption that, over long periods of time, corn 
varies little in its command over labor. Presumably this stability of 
relation is due to the assumed connection between population increase 
and the necessities of subsistence or the established requirements of 
existence. Thus, while by improvements either in technique or in the 
conditions of environment, labor might for a considerable period be 
more generously rewarded in products, this condition, it is thought, is, 
after all, certain to be a temporary one, population tendencies being 
safely to be relied upon to take up the slack, whether that slack be 
reckoned as a differential above the absolute requirements for living, 
or above some standard of consumption below which laborers will 
refuse to reproduce themselves. 

There may be reasons enough to condemn this attempted justifi- 
cation of the corn standard by the labor standard, consistently with 
retaining faith in the labor standard itself; it therefore remains to 
inquire to what extent Smith's acceptance of the labor standard was 
justifiable in the light of the theoretical equipment of his time, and to 
what extent and with what modifications it may serve for the purposes 
of more modern theory. 

There was for Smith, at all events, this much of justification for 
the acceptance of the labor standard — that, in his view, to refuse it 
would be abandon all hope of any standard, while the acceptance of 
it would assimilate the standard of deferred payments to the standard 
of value for current exchanges — a consummation still (though per- 
haps for no very evident reason) devoutly desired by many monetary 
theorists. To Smith, as to most economists of later years, the prob- 
lem of deferred payments presented itself as a value problem. Con- 
ceived as such, the degree of development of theory in Smith's time 
could possibly have afforded nothing better or other than this labor 
standard ; nor, indeed, has later theory achieved anything more, so far 
as, for deferred-payment problems, cost and value solutions have been 
the object of search. For it is clear that value conceived merely as a 
ratio of exchange affords no clue to a deferred-payment standard. Only 
when, as the essence or significance or determinant of value, some 



1 8 VALUE AND DISTRIBUTION 

that would. It may not yet be clear on precisely what 
grounds this common denominator was so pronouncedly a 
desideratum; but, for whatever it was worth, the labor 
measure was the only thing possible for the time. And it 
may fairly be questioned whether later thought, in its 
endeavor to substitute utility for labor cost as a value deter- 
minant, thus stating the payment problem in terms of utility 
truly, but only of utility as working itself out in terms of 
value expression, has been able to do more upon the utility 
side than to repeat the error made upon the cost side, that, 
namely, of seeking to compare things which in their funda- 
mental nature offer no basis of comparison; with value 

underlying principle is discovered, is it possible to adopt as a deferred- 
payment basis a value standard. Whether or not the multiple standard 
or some variable subsistence or standard-of-living standard may not 
now be regarded as preferable, it is perhaps sufficient for present pur- 
poses to point out that these are standards of utility, rather than of 
cost or of value, and therefore do not, in strictness, concern this 
stage of the discussion. 

But it may none the less be possible to justify the labor standard 
as held by Smith without appeal to value categories. 

It is evident that the labor and the standard-of-living standards 
must in the long run come to coincide, or at all events must always be 
in process of approaching coincidence. The total consumption of 
wealth depends upon the total productive efficiency of society : average 
consumption is the derivative of average production. Standards of 
living express the general or average efficiency in production, as 
reflected in the habits and customs of consumption. It is, no doubt, 
true that if the increase in the per-capita output of wealth is rapid, the 
felt necessities of adequate living may somewhat lag behind the oppor- 
tunity afforded by the level of production ; but it remains true that the 
new level of production is all the while in process of becoming fixed 
as a new level of requirement. In the meantime, however, as the 
history of the last hundred years abundantly shows, there is, because 
of this phenomenon of lagging — this slack between the lately acquired 
power and the earlier established need — room for some shortening of 
the labor day. None the less a commodity standard of payment which 
should coincide with the labor standard must be a standard expressive 
of the changes taking place in labor productiveness ; not, however, 
productiveness in terms of corn alone, but productiveness in terms of 
those commodities, whether corn or other, for which incomes are 
expended — that is, productiveness expressed in terms of the derived 
consumption. 

What bearing has all this upon the proposal that the money pay 
ment should be adjusted at that sum of money affording a command 
over commodities equal to that of the money loaned — that is to say, 
the acceptance of the principle of the multiple standard ? 

Recalling once more the fact that this computation is entirely out- 
side the value field, that the proposed payment is in terms a utility 
standard, it is obvious that if, between loan and payment, time enough 
has elapsed for an appreciable change in the standard of living, in the 



ADAM SMITH 19 

conceived as a mere ratio of exchange, the assertion of 
equality or of inequality between two values can have, for 
the purposes in hand, no possible meaning, unless and until 
some basis of homogeneity between the quantities in the 
respective value ratios has been established. Thus, in last 
analysis, equality for deferred-payment purposes will have 
to be worked out by somehow appealing to concepts of 
quantity rather than always to mere ratios between quan- 
tities. 

So much, for the time being, for the deferred-payment 
problem ; there remain for discussion Smith's concepts of 



felt necessities of consumption, payment in an equal command over 
commodities cannot be a full equivalent for the benefits received, or an 
adequate indemnity for the benefits foregone. The want-satisfying 
quality of objective units of goods has fallen ; something must be 
allowed here not only for changes in the direct service, the want-satis- 
fying power, afforded by similar items of goods, but more, also, for 
changes of service consequent upon the rising level of requirement 
for the maintenance of social position and relative well-being. It is 
here distinctly to be recognized that in large measure consumption is 
itself a competitive thing. 

Neither in theory, therefore, as a value computation, nor in its 
practical working out as a utility computation, does Smith's labor 
standard afford an entirely satisfactory basis for the solution of the 
deferred-payment problem. "Ultimately speaking, things are not useful 
because they cost effort, but the effort is put forth because the things 
are useful. It was usefulness and not effort that the debtor borrowed, 
it was the product of his effort and not effort that the creditor loaned. 
It is, then, in terms of usefulness that payment should be made. Labor 
is the producer of utility and not the substance of it. 

"But it must be remembered that by this very measure of useful- 
ness, payment must be made in something more than an equivalent 
command over commodities. The increased effectiveness of labor has 
brought about a higher level of consumption, a raised standard of 
comfort and of life. This is a gain to such members of society as are 
able to attain to this new level ; it is the reverse to those who fall 
[too far] short of it. A new need plus the ability to satisfy the need 
is an advance in well-being ; without the ability the need is a mis- 
fortune. The line then of compensation — of equality in sacrifice — 
must be found somewhere above equality in purchasing power, some- 
where below equality in command over human effort. Something must 
be added to payment on account of the greater necessities of the lender ; 
something also on account of greater requirements for the maintenance 
of social position and relative well-being. The point of fair adjustment 
is to be found where the direct gain from larger satisfactions is offset 
by the disadvantage of increased requirements and decreased com- 
mand over social distinction." — Davenport, Outlines of Economic 
Theory, p. 229. 

More extended discussion of this problem must be postponed to a 
later chapter. See pages 175 to 188. 



20 VALUE AND DISTRIBUTION 

labor, (i) as determinant of value, and (2) as measure or 
denominator of coexisting values. 

(i) That things are valuable more or less in proportion 
to the labor required in their production is matter of com- 
mon observation; the Crusoe analysis sets this truth forth 
in simple form. But the principle is equally manifest in 
more complex conditions; the more the labor required for 
the production of any commodity the higher the wage 
outlay. 

Not merely this; but for the simpler aspects of produc- 
tion, and in large measure for production generally, it may 
be said that products trace their origin to human labor; 
labor is, technologically speaking, a cause, and, in careless 
thinking, is prone to be taken as the sole technological 
cause of the existence of things possessing value. The con- 
clusion thus lies readily at hand that the quantity of labor 
content is the determinant of exchange value. Labor is in 
this view conceived not merely as the mechanical cause 
of product, but as the quantitative cause of value, just as, in 
later thought, the utility doctrine has been applied to eluci- 
date the causal sequence : utility being conceived as neces- 
sary condition to value, there is constant temptation to 
explain the quantity of value by the quantity of utility. But 
in either case, or in any event with labor, the necessity 
presents itself of arriving at some basis of homogeneity; 
and to serve as explanation of value this homogeneity 
must be something other than a homogeneity derived from 
the value product. 

Nevertheless, the affairs of ordinary business life, the 
commonplace facts of the wage relation, make it sufficiently 
evident that labor has a value, and that in many cases, if not 
in all, the value of the product is somehow concerned with 
the value of the labor agents required in its bringing forth. 
The labor-value-cost doctrine is unquestionably true in the 
sense that the value of labor takes some part as a determi- 
nant, whether intermediate or ultimate, of value relations. 
But precisely here was and is the problem ; is this labor 
value ultimate and self-sufficing, or is it merely an inter- 
mediate term in some longer chain of causal sequence? 
So far as Smith formulated any answer to this question, it 
was to ascribe to labor a non-derivative homogeneity and 
a non-derivative value, and to make this value serve as the 
explanation, in terms of causation, of exchange relations. 

And so in chapter vi it is argued that if among a nation, 



ADAM SMITH 21 

say, of hunters, it usually costs twice the labor to kill a 
beaver that it costs to kill a deer, one beaver will naturally 
exchange for — will be worth — two deer. It seems, 
indeed, to go almost without saying that what is usually the 
product of two days' or two hours' labor should be worth 
the double of that which is the product of one day's or one 
hour's labor. 

But the further discussion makes it fairly evident that 
the hunter case was chosen by Smith as one of approximate 
homogeneity of labor power, a nation of hunters, and also, 
be it remarked, as a case of the relatively minor importance 
of capital or land considerations. And upon this assump- 
tion of the approximate or complete homogeneity of pro- 
ductive agents the doctrine sums up in a statement of 
proportionality : as quantity of labor is to quantity of labor, 
so is value of product to value of product; labor: labor: : 
value : value. And neither in Smith's nor at any later 
time has this been open to question, upon the assumptions 
made. But the truth admittedly contained in the proposi- 
tion does not of necessity impose the labor-value explana- 
tion. The non-mathematical statement of the case is equally 
exhaustive ; unless the hunter could get as much out of his 
labor with one sort of game as with the other, he would 
trap for only one sort, and all of this irrespective of any 
question of whether hunting be a pleasure or a hardship, 
or whether labor has or has not in itself a value by its own 
right. In point of fact this doctrine of proportion is 
nothing more or less than an example of opportunity cost 
applied under the assumption of homogeneous agents of 
production. 

In the next paragraph, however, it is said: 

If the one species of labor should be more severe than the 
other, some allowance will naturally be made for the superior 
hardship; and the produce of one hour's labor in the one may very 
frequently exchange for that of two hours' labor in the other; 

all of which is correct as matter of everyday fact; but 
note that in just so far does the proportion doctrine fail ; 
and at the same time there disappears the last vestige of 
time cost. Indeed, there appears some suggestion of pain 
cost. And yet, by the sentence next following pain cost is 
excluded : 

Or if the one species of labor require an uncommon degree of 
dexterity and ingenuity, the esteem which we have for such talents 



22 VALUE AND DISTRIBUTION 

will naturally give a value to their produce superior to what would 
be due to the time employed about it — 

the old labor-cost doctrine, but supplemented by a new and 
non-cost explanation for the evident and perplexing incre- 
ment of value, the esteem in which talents are held. But in 
the succeeding sentence the pain-value doctrine is rehabili- 
tated : 

Such talents can seldom be acquired but in consequence of long 
application, and the superior value of the produce may frequently 
be [no?] more than a reasonable compensation for the time and 
labor which must be spent in acquiring them. In the advanced 
state of society allowance of this kind for superior hardship and 
superior skill are commonly met in the wages of labor. 

That is to say, the greater wage must at least counter- 
balance, for the individual worker, the greater hardship of 
the work or the greater expense of preparation, else the 
occupation will not be undertaken or will be abandoned. 
But evidently this gives no explanation for the superior 
wages of native skill. The discussion continues : "Over 
and above what might be sufficient to pay for the price of 
the materials and the wages of the workmen" — employer's 
outlay cost — "something must be given for the profits of 
the undertaker of the work who hazards his stock in the 
venture." Risk cost? "The value which the workmen add 
to the materials, therefore, resolves itself, in this case, into 
two parts, of which one pays their wages, the other the 
profits of the employer." But that, in Smith's thought, 
this profit includes something more than risk profit is not 
open to doubt: though there is not yet any necessary sug- 
gestion of wages of superintendence: "two parts, of which 
the one," etc., 

the other the profits of the employer upon the whole stock of 
materials and labor which he advanced. He could have no interest 
to supply them unless he expected from the sale of their work some- 
thing more than what was sufficient to replace his stock to him, 
and he could have no interest to employ a great stock rather than a 
small one, unless his profits were to bear some proportion to the 
extent of his stock. 

This might well be justified as a doctrine of opportunity 
cost, but such seems not to be Smith's thought ; he appears 
to have in mind merely abstinence cost, as a quantity addi- 
tional to risk cost. 



ADAM SMITH 23 

In every great work almost the whole labor .... is committed 
to some principal clerk. The owner of the capital, though he is 
thus discharged of almost all labor, still expects that his profits 
should be a regular proportion to his capital. In the price of 
commodities, therefore, the profits of stock constitute a compo- 
nent part altogether different from the wages of labor and regu- 
lated by different principles.* 

Here Smith, perhaps with good justification, argues 
that abstinence cost cannot, at all events proportionately, be 
explained or defended as pain cost. But later this position 
was abandoned ; and it is clear enough, if the case is looked 
at from the point of view of the employer — whether as 
outlay cost to the borrowing entrepreneur, or as either 
investment-opportunity or production-opportunity cost to 
the capitalist employer — that interest and wages must be 
regarded as upon the same footing. 

And as we have seen, this is not infrequently the point 
of view of cost adopted by Smith. For example, in chap- 
ter vii he sets forth natural price (normal exchange 
value) as the general average of "what it really costs the 
person who brings it to market." But at the same time this 
price must cover the profit which the producer could else- 
where have made; "If he sells at a price which does not 
allow him the ordinary rate of profit in his neighborhood, 
he is evidently a loser by the trade ; since by employing his 
stock in some other way he might have made that profit ;" — 
opportunity cost.^ 

His profit, besides, is his revenue, the proper fund of his sub- 
sistence. As, while he is preparing and bringing the goods to 
market, he advances to his workmen their wages, or their subsist- 
ence; so he advances to himself, in the same manner, his own 
subsistence Unless they yield him this profit, therefore, they 

*Adam Smith, op. cit., chap. vi. 

^ While there is no doubt that Smith in many places adopts — and 
never in terms repudiates — this entrepreneur-cost point of view, it is 
equally clear that at other times he as definitely accepts and emphasizes 
the labor-pain and the labor-value doctrines. Whittaker certainly goes 
much too far in the following: "As a theory of value .... Adam 
Smith left us an early form of the law of entrepreneur's cost and a 
labor-command measure of value. But he disowns what is naturally 
thought of as the genuine classical theory of value, that labor cost 
regulates market value. This theory was Ricardo's and really his 
alone." — Albert C. Whittaker, History and Criticism of the Labor 
Theory of Value in English Political Economy, Vol. XIX, No. 2, of 
"Columbia University Studies," p. 31. 



24 VALUE AND DISTRIBUTION 

do not repay him for what they may very properly be said to have 
cost him. 

The natural price must, then, also recoup him for these 
expenses of living — an employer's subsistence or standard- 
of-living cost. True, he may not get this price, but this is 
the lowest price "at which he is likely to sell — for any con- 
siderable time." 

But this subsistence-cost doctrine does not, after all, 
appear to Smith quite to suffice; the price is set forth as 
safely to be assumed as the lowest long-time price only 
upon the assumption that there is freedom of changing 
occupations. But where such freedom exists, it is really the 
principle of displacement that is being appealed to; these 
possible alternatives of employment offer a typical example 
of opportunity cost. 

In this chapter vii consistent account first begins to be 
taken of the fact that capital and land are important agents 
in the productive process. Henceforward, the talk of 
homogeneity in productive powers ceases ; henceforward, 
the discussion mostly goes on the basis of employer's cost 
as against pain or time cost; the doctrine, so far as con- 
sciously formulated, is that of outlay cost, and in the main, 
impliedly as well as consciously, is outlay cost as against 
opportunity cost. 

And so, in addition to the claims of the capitalists, "as 
soon as the land of any country has all become private 
property, the landlords .... demand a rent even for the 
natural produce. The laborer .... must then give up to 
his landlord a portion of what his labor either collects or 
produces." 

Now here, again, the land is conceived as passive oppor- 
tunity rather than as productive agent ; the laborer is repre- 
sented as giving up a part of what in its entirety his own 
labor has produced. "This portion, or what comes to the 
same thing, the price of this portion, constitutes the rent of 
the land, and in the price of the greater part of commodities 
makes a third component part." So, from the point of view 
of outlay cost and of exchange value, rent, like interest, 
disturbs the labor-cost principle as a causal and determi- 



ADAM SMITH 25 

nant fact for exchange relations, unless, indeed, it be pos- 
sible to regard land and capital as substitutes for labor and 
as, so far, making labor unnecessary to be done or to be 
paid for. Formally, this would, perhaps, imply no lack of 
loyalty to the labor standard, loyalty, however, not to labor 
in terms of pain, but solely to labor in terms of pain or of 
something instead of pain ; nor, indeed, is it, in last analysis, 
an insistence upon labor in any aspect, but only upon some- 
thing, production-wise, a substitute for labor. And if this 
interchange between labor and substitutes is accepted as 
possible, it should be equally open to reverse the process and 
to regard labor as the substitute for land or capital services, 
thus reducing all costs to equivalents in rent or interest. 
But this comes perilously near to surrendering the whole 
labor-cost position, and to adopting in its entirety the out- 
lay-cost point of view. 

But — and now we come to an example of Smith's treat- 
ment of labor as value standard or measure — nothing of all 
this necessarily bears to disturb labor as the best and per- 
haps the only medium of expression and common denomi- 
nator of real value. 

The real value of all the different component parts of price, it 
must be observed, is measured by the quantity of labor which they 
can, each of them, purchase or command. Labor measures the 
value, not only of that part of price which resolves itself into 
labor, but of that part which resolves itself into rent, and of that 
part which resolves itself into profit. 

Here evidently, the thought is simply and purely one of 
measure — of standard — and not of cause. But a shift in 
concepts has nevertheless taken place — a shift later to be 
exploited at the full by Malthus — from labor as the basis of 
value by virtue of the labor-pain investment, to labor as 
basis in tenns of pain-purchasing power or of pain-avoid- 
ing power — ultimately, therefore, of service-rendering 
power.^ 

* Thus the following states only one of the two positions held by 
Smith with regard to the labor standard: "To Smith, labor is the 
great, homogeneous, undiflferentiated common denominator to the 
wonderfully diverse mass of goods which come into existence out of it, 
and the value or 'real worth' of each of these goods follows the 
quantity of the source-stuff turned to its production." — Whittaker, 
op. cit., p. 34. 



26 VALUE AND DISTRIBUTION 

In chapter vii it is written that, 

when the price of any commodity is neither more nor less than 
what is sufificient to pay the rent of the land, the wages of the 
labor, and the profits of the stock employed in raising, preparing, 
and bringing it to market, according to their natural rates, the 
commodity is then sold for what may be called its natural price. 

There is here no attempt to explain these natural rates, 
either as costs to the employer or as incomes to the owners ; 
they are simply normal or natural rates, and the produced 
commodities incorporate these rates into the natural cost, 
with the result that the corresponding price is the natural 
price. There is here, however, unconsciously but neces- 
sarily implied an opportunity-cost analysis, as the explana- 
tion of these existing rates of compensation to which, as 
costs, the production of every particular commodity is 
subject. And this opportunity doctrine is, in fact, recog- 
nized, so far as the employers' profits are concerned: 

Though in common language what is called the prime cost of 
any commodity does not comprehend the profit of the person who is 
to sell it again, yet if he sells it at a price which does not allow 
him the ordinary rate of profit .... he is evidently a loser by 
the trade; since by employing his stock in some other way he might 
have made this profit. 

But in the paragraph next following appeal is made, 
as we have already seen, to the doctrine of subsistence cost : 

While he is preparing and bringing the goods to market he 
advances to the workmen their wages, or their subsistence; so he 
advances to himself in the same manner his own subsistence which 
is generally suitable to the profit which he may reasonably expect 
from the sale of his goods. 

It is now to be remarked that here the standard is one 
not of necessary subsistence, nor accurately one of permanent 
and established standard of Hving, but a sort of short-time 
standard based upon the expected profit: but the stand- 
ard serves for the purposes in hand as does the laborer's 
wage ; it is the amount necessarily paid, or at all events the 
amount actually paid to one of the producing agents — out- 
lay cost. However, Smith is not faithful to this concept; 
nor can he well be so, for evidently one is not held to con- 
sume all of his profits; and whether he does or does not 
consume them all, and whether they are great or small, it is 



ADAM SMITH 27 

probable that he will take them if they are the best that he 
can get. 

If at any time it [the supply] exceeds the effectual demand, 
some of the component parts of the price must be paid below the 
natural rate. If it is rent, the interests of the landlords will 
immediately prompt them to withdraw a part of their land; if it 
is wages or profits, the interests of the laborers in the one case 
and of their employers in the other, will prompt them to withdraw 
a part of their labor or capital from this employment.'' 

This is opportunity cost so extended as to include all 
forms of outlay of productive goods or for productive goods, 
rent included ; and the same argument is applied in reverse 
order to higher prices. Smith proceeds : "The natural 
price is, as it were, the central price, to which the prices 
of all commodities are naturally gravitating." 

However, Smith's ideas as to the relation of rent to cost 
and to price were especially and notoriously vague and 
vacillating. In chapter ix, the rent of land, these notions 
of outlay cost and opportunity cost get, so far as rent out- 
lays are concerned, a serious back-set : 

Rent enters into the composition of the price of commodities 
in a different way from wages and profit. High or low rent is 
the effect of it. It is because high or low wages or profit must be 
paid in order to bring a particular commodity to market that its 
price is high or low; but it is because its price is high or low, a 
great deal more or a little more or no more than what is sufficient 
to pay the wages and profits, that it affords a high rent or low 
rent or no rent at all. 

This distinction between rent outlays and other outlays 
can evidently not greatly signify from the point of view of 
outlay cost. But there is another point of view from which 
the distinction is important. Rent arises only as a question 
of individual and competitive cost. Socialized production 
would meet with land differentials, but the aggregate prod- 
uct would stand as the aggregate remuneration for the 
total social outlay and effort : some of the product would, it 
is true, have required less outlay than other ; but if any sys- 
tem of exchanging, by barter or otherwise, existed, these 
differences in land quality could have no significance for 
the terms of the exchanges ; nor could they figure as addi- 
tions to cost; at the most, as differentials, they would only 

^ Adam Smith, op. cit., chap. vii. 



28 VALUE AND DISTRIBUTION 

be differentials of saved cost. But in a competitive society 
these differentials of productivity have to be paid for under 
the guise of outlays made for the privilege of enjoying 
them. So again, but for a different purpose, we return to 
the distinction between competitive and collective cost. 
Every improvement in production, whether of developing 
technique, or of better land, or of more abundant land, or 
of better capital or more abundant capital, is, from the 
social point of view, the occasion and cause of diminished 
labor cost — a larger product for a given total of production 
burden.^ 

* Note, however, that this discussion of collectivist labor cost 
has in view only such productivity differentials as concern only one 
line of products. But commonly, of course, differentials of quality for, 
say, wheat production are accompanied by differentials for other lines 
of product. In such cases another cost computation requires attention 
in the collectivist reckoning. Displacement cost — opportunity cost — 
is really the leading and almost the exclusive form of cost for 
collectivist economics. Labor cost is, in fact, of extremely small 
significance, excepting in this aspect of alternative applications. All 
that the text intends to assert is that instrumenal differentials of 
productivity for any one line of production can have no significance 
in collectivist computations. 



CHAPTER III 
RICARDO 

At the present day it is a task neither of great difficulty 
nor of great merit to convict Adam Smith of inconsistency 
and even of direct contradiction. Were the purposes here 
in view essentially those of criticism, it would thereby be 
the more necessary to keep in mind that the strength of 
Adam Smith lay in his breadth of information, his accuracy 
of observation, his suggestiveness of comment, and his 
catholicity of doctrine. He was not in his time, and could 
hardly have been in any time, a close worker in systematic 
theory: He failed to see the town for the houses, the 
forest for the trees ; but he knew wondrous well the houses 
and the trees. His habit of mind was concrete and prac- 
tical. Despite, however, this consistent practicality, almost 
every theoretical aspect of every question struck him at one 
time or another. In economic doctrine, as has been said of 
Shakespeare in observation of life, the ocean of his sympathy 
lapped all the isles of thought. For the present purposes, 
therefore, which are, in the main, expository and analytic 
rather than historical or critical, Adam Smith offers an 
incomparable field for profitable discussion and illustration. 

Not precisely so with Ricardo or with his contem- 
poraries, Malthus, James Mill, and MacCulloch. Ricardo 
was in purpose and method a systematizer, with a theorem 
to expound and a theory to establish; consistency and logi- 
cal coherence were parts of the task to which, despite slight 
equipment in style and in expository skill, he had set him- 
self ; and in this purpose, so far as consistency and logical 
unity were concerned, he was, on the whole, surprisingly 
successful. His defects of exposition, however, render the 
task of interpretation especially difficult: it may thus be 
possible that one more attempt at restatement and reinter- 

29 



3© ' VALUE AND DISTRIBUTION 

pretation of his doctrine may be serviceable, even after the 
sympathetic and masterly and, in the main, definitive study 
of Mr. E. C. K. Gonner.i 
/ 

Very confusing in Ricardo's discussion is the fact that 
there are two senses for each of the terms value and value 
of labor; value meaning (i) real value, in the sense of 
labor-investment value — concreted pain cost; (2) power 
in exchange. Value of labor sometimes means (i) mere 
exchange power, market value of labor; (2) labor as a 
ratio to profit, a distributive fraction, a relative share in a 
product the absolute value of which is irrelevant to the 
concept. 

And thus with regard to the famous proposition that 
neither wages nor profits can rise or fall unless to the 
corresponding loss or gain of the other factor, James Mill 
makes it clear that this is never asserted by Ricardo except 
in the sense of relative shares : 

If a change in the amount of commodities is meant, it will 
not be true, in that sense, that profits so depend upon wages as to 
fall when wages rise, and rise when wages fall; for both may fall 
and both may rise together. And this is a proposition which no 
political economist has ever called in question.^ 

But note that in the sense neither of exchange power nor 
of ratio shares does Ricardo commit himself to the doctrine 
that the value of the labor is derived from the value of the 



^ All references are to Conner's edition of Ricardo. 

^ James Mill, Elements of Political Economy (3d ed., London, 
1844), chap, ii, sec. 3. 

"Ricardo never asserts or imagines that wages and profits cannot 
increase together, so far as the amount of commodities that measure 

them is concerned What he denies is that one can obtain a 

larger share of the total value without the other experiencing a 
diminution in its share." — Conner (Ricardo) : "Introductory Essay," 
sec. 15. 

"Each commodity represents a certain amount of force, and thus 
the total quantity produced represents the total force of the country. 
Should invention facilitate production .... each commodity subject 
to the invention must cease to represent as great an amount of 
force ; .... in other words, its real value would be less." — Ibid,, 
sec. 9. 



RICARDO 31 

product. His is consistently a cost-of-prnduction view. 
But he equally carefully avoids making the exchange value 
of the labor the cause, through costs, of the exchange rela- 
tions of the products. He does not deny that labor has 
value; this is as clear as that land has value: but with 
land he denies, and with labor he declines to assert, any 
cost-causal relation. To grasp this point is crucial to any 
right understanding of Ricardo. He has no explanation 
for the value of labor excepting by the necessities of living 
according to the established standard, a sort of cost doc- 
trine for labor. He terms labor the "foundation of 
exchange value;" it is the very essence and significance of 
real value. Exchange values are merely proportional to 
real values. "The connection between exchange value and 
so-called real value is simple. On the degree to which a 
commodity as compared with other commodities is pos- 
sessed of the latter, depends its position in the ratio of 
exchange." ^ 

Labor is conceived by Ricardo as a leveler of exchange 
value, and this solely through the efforts of holders of it or 
of purchasers of it to apply it at the maximum of advan- 
tage. It is true that the working-out of this by entrepre- 
neurs is in terms of cost to them but, according to Ricardo, 
their computations do not express the ultimate fact; cost 
is not decisive excepting in this sense of proportionment ; 
production costs in the ordinary sense depend upon real 
costs, that is, upon the quantity of labor applied; and so 
the doctrine formulates, value : value : : cost (=labor) : 
cost (=labor). And it thus comes about that labor, the 
basis and essence of real value, may serve as a standard and 
common denominator of exchange value. In final analysis, 
labor does not determine value through its own value, but 
merely determines, by the proportion of it incorporated in 
different commodities, the relations of exchange value 
between these commodities. Labor might halve or double 
in productive power, and yet no effect be felt in the ratios 

^ Ibid., sec. 9. 



32 VALUE AND DISTRIBUTION 

of exchange. So wages might vary indefinitely in rise or 
fall without modifying these market relations: 

No alteration in the wages of labor could produce any altera- 
tion in the relative value of these commodities The same 

reasons which should make the hunters and fishers endeavor to 
raise the value of their game and fish would cause the owner of the 

mines to raise the value of his gold The relative situation 

being the same before and after the rise of wages, the rela- 
tive .... value would remain unaltered.* 

But if the labor quantities change relatively, changes 
will follow in value. 

Every improvement in machinery, in tools, in buildings, in rais- 
ing the raw material, saves labor and enables us to produce the 
commodity to which the improvement is applied, with more facility, 
and consequently its value alters." 

In what direction Ricardo would look for the explana- 
tion of all this may not be clear; but it is certain that he 
does not find it in any invariability in the value of labor. 
Labor does vary both in ratio value, its share relative to 
profit, and in commodity-purchasing power, its exchange 
value : 

Therefore it cannot be correct to say with Adam Smith "that 
as labor may sometimes purchase a greater and sometimes a 
smaller quantity of goods, it is their value that varies," — ^but it is 
correct to say that the proportion between the quantities of labor 
necessary for acquiring different objects seems to be the only cir- 
cumstance which can afford any rule for exchanging them for one 
another.' 

Nor would Ricardo have concurred in the assertion of 
an invariable real value in labor; but only of invariability 
in the exchange relations of things invariable in their rela- 
tive labor content. Labor value as reality in contra-distinc- 
tion to labor value as an exchange fact, Ricardo did not 
recognize, or, for that matter, deny ; he had no need for the 
distinction. For any purpose of his the value of labor is 

* Ricardo, Political Economy, chap, i, sec. 3, par. 16. 

^ Ibid., chap, iv, par. 18. 

^ Ibid., chap, i, sec. i, par. 10. 



RICARDO 33 

variable ; "being not only affected as other things are by the 
proportion between supply and demand .... but also by 
the varying prices of food and other necessaries on which 
the wages of labor are expended." '^ 

But how does this proportion doctrine, this function of 
labor as a leveler of values, come to be in any sense a cost 
doctrine, or justify the repute of Ricardo as the great cost- 
of-production theorist? As generally interpreted, and by 
his own express assertion, he holds that the value of any 
given article depends upon its cost of production; but the 
connection between labor cost and cost of production in 
the sense of outlay cost comes about through the entrepre- 
neur working-out of the proportion principle. As regards 
the value of any one commodity, its cost, its selling-price, 
the mere outlay investigation would be an adequate solu- 
tion ; with wages so much, materials so much, etc., the price 
would have to be so much. But Ricardo was attempting 
to see the value problem whole, not merely as a question of 
this commodity or that, considered separately — a purely 
individualist-entrepreneur standpoint — but of all commodi- 
ties taken together in their interrelations of exchange. For 
this purpose the various cost outlays would not serve as a 
basis of explanation, but would themselves be simply so 
many more items of fact awaiting each its separate explana- 
tion. 

Summarizing, therefore, the case as thus far stated, we 
may say that Ricardo makes labor important only as the 
basis and inner meaning of real value. The doctrine of 

''Ibid., chap, i, sec. i, par. 9. 

In view of Ricardo's distinction between value and riches, as set 
forth in chapter xx, it must be admitted that the above interpretation 
might fairly be questioned. But in a letter to Say, dated January 2, 1820, 
Ricardo writes : "You seem to me to have misunderstood one of my 
propositions. I do not say that it is the value of labor that determines 
the value of the product ; this is a view which I am trying with all my 
power to refute. I say that it is the comparative quantity of labor 
necessary to production which determines the relative value of prod- 
ucts." [This is translated from the French ; I have not been able to 
place my hand upon the original, which I take to have been in 
English.] 



34 VALUE AND DISTRIBUTION 

real value is still everywhere a cost doctrine of the labor 
sort; the purpose of activity is to secure pleasure or to 
avoid pain ; in either case, pain is the method and the price 
of attainment, the cost, and thereby an expression of the 
value of the thing or fact attained, or of the external agent 
or implement affording it. Thus it comes about that 
Ricardo distinguishes sharply between riches and ' real 
value; with riches the emphasis is upon quantity of utility, 
of weal ; with value, upon cost. 

All of this, as we have seen, falls under the head of 
real value. But for exchange value he recognizes that, 
even in the simplest cases, labor gives only a method of 
arriving at relations between commodities, their exchange 
ratios ; it is a measure in this sense only, and comes to serve 
as such only through the leveling influence of costs, by 
virtue of the constant tendency on the part of producers to 
apply labor at its greatest advantage. Pain cost has here 
nothing to do with the case, excepting as pain may have 
something to do with the sums which must be paid for 
labor in order to get it. Neither labor, nor pain as in 
some way implied in labor, has any significance for 
exchange value otherwise than as standard or measure or 
common denominator. An indirect significance is worked 
out only through the leveling or proportioning mechanism.* 

In point of fact, with all the Ricardian group, as with 
Smith, the desideratum in the exchange-value prob- 
lem was to get at a measure ; the real-value doctrine was 

* In the light of the foregoing, sharp dissent must be expressed 
from the view of Ricardo held by Whittaker : "Ricardo contributed 
very little to the advancement of the empirical, that is, the entre- 
preneur account as such. The direct line of descent of this doctrine is 
traceable from Smith's Wealth of Nations through the Principles of 
Malthus and J. S. Mill to Marshall. Neither Ricardo nor Cairnes can 

be considered to stand in the line Ricardo never stated a law 

of entrepreneurs' cost plainly, formally, as such, though he gave it an 
obscure recognition as a source of difficulty to the pure labor theory 
of value" (Whittaker, op, cit., pp. 14, 15). 

The following appears to be by much the more accurate state- 
ment : "Ricardo's real conception of normal value is this : the total 
cost of a commodity determines the total wages charges that must be 
paid by the entrepreneur, or series of entrepreneurs, producing it" 
(ibid., p. 51). 



RICARDO 35 

sufficient for more fundamental consideration of causes, 
and as bottoming economics upon some final, definitive, and 
underlying substratum of reality. If land, the Physiocratic 
basis, was discarded, what else could serve, if it were not 
labor? In view of the comparative utility of water and 
wine, or of corn and gold, and in the absence of any notion 
of marginal utility, utility could not serve for the case — 
whether or not we shall now say that the required homo- 
geneity has later come with the marginal notion. And even 
if utility could have been made to apply, this was not that 
bed-rock of reality which was in quest. And so much the 
more this search for the ultimate could not content itself 
with simple exchange ratios. Ratios of what? Determined 
by what? A mere ratio of exchange was as if a man should 
stand firmly, resting neither on one leg nor on the other, 
but held upright by the mutual support of the two. Possibly 
the situation was of this sort for the moving equilibrium of 
the heavenly bodies — tied to nothing and upheld by nothing 
— but if so it was admittedly not greatly to their credit. 
The only exit from the dilemma appeared to be by the 
way of labor, as definitive and real, causal and determi- 
native. 

But for exchange value, nothing of the sort was claimed 
for labor, but only that it was adapted to serve in the 
second of Adam Smith's roles, that of value denominator.^ 

It must now be admitted that Ricardo's essential posi- 
tion that commodities rise or fall in exchange value in 

° Malthus concurring in this notion that a common measure for 
value must be discovered, and that labor offered the only hope, was yet 
disposed to disagree with Ricardo and to adopt not the common 
denominator of labor in the cost aspect — ^by test of what had been 
done, a system of byegones — but by the forward-looking method of 
what the product, once produced, would command in labor or in the 
products of labor. 

For clearly, said Malthus, if a manufacturer really makes a 
profit, he must get back for his product the power to control more 
productive energies than he put into his commodity. If the less labor 
of today will now do the work of the more of yesterday, an equal con- 
trol of labor must imply a profit. It is the purchasing power of any 
product that really signifies to the producer of it, and if labor is agreed 
to be the measure-medium, it should be so in the sense of labor- 
purchase rather than of labor-investment. True, these quantities may 
commonly coincide, but if the coincidence fails, the preference should 
be accorded to purchasing power. — T. R. Malthus, Political Economy, 
chap. i. 

Possibly so ; but it is sufficient, for our present purposes, to point 
out that Malthus is here vaguely feeling toward the utility measure of 
value ; that is to say, his doctrine is fundamentally not a cost doctrine. 



36 VALUE AND DISTRIBUTION 

proportion to the rise or fall in the labor requirement in 
their production would hold, if (i) labor could be reduced 
to homogeneity excepting in terms of value productivity, 
and if (2) the doctrine could be made to account adequately 
for the roles of land and of capital in production. 

As to land, Ricardo felt no considerable difficulty. He 
ruled rent out of the problem, by a course of reasoning 
familiar to all economists and still commonly accepted. It 
is unnecessary to inquire here whether modern theory has 
done well in accepting this Ricardian doctrine as to the 
relation between rent costs and values — there is much wait- 
ing to be said in this regard, — but it is certain that Ricardo 
did not do well in attempting to fit this doctrine into his 
general system. His doctrine of cost was one of competitive 
and not of collectivist cost; it was worked out in terms of 
entrepreneur competitions by the sheer necessity of its 
character as competitive; the doctrine of the proportion- 
ment of value to labor, the leveling doctrine, finds its basis 
in the principle that each entrepreneur will use his costs, as 
a total, in the way to get from them the greatest total of 
exchange power. In short, Ricardo's doctrine of propor- 
tion was worked out through the entrepreneur mechanism 
and was nothing more or less than competitive opportunity 
cost; and had he only furnished the doctrine forth with an 
apparatus of margins and of producers' differentials, and 
had he disposed of rent, as well as of interest, by frankly 
and freely making room for both within his formula, much 
in modern value theory might have been other — and better 
— than it is today.^** 

However, there would of course have remained the old 
difficulty about the homogeneity of labor; and a new diffi- 
culty would forthwith have arisen — how to make land costs 
homogeneous with labor costs, otherwise than on the seem- 
ingly question-begging value basis. And then, again, 

" Malthus' view was more consistently in line with the entre- 
preneur-cost concept : "It appears to me essential .... to say that 
the cost of producing any commodity is made up of all the wages, all 
the profits, and all the rents which .... are necessary to bring that 
particular commodity to market in the quantity required" (Malthus, 
op. cit., I St ed., pp. 102, 103). 

"Malthus proceeds to a thorough criticism of Ricardo's law of 

labor cost There are (i) the temporary alterations of prices 

too rapid to be met by changing the volume of production ; (2) 
monopoly in the product itself, or some raw product used in its 
making; (3) seasonal fluctuations in all products of the soil . . . . ; 
(4) the different proportions of fixed capital employed, the different 



RICARDO 37 

finally, the same questions would immediately have pre- 
sented themselves with regard to capital. 

But they presented themselves as it was. Ricardo was 
perfectly well aware that, in getting rid of rent, he had 
merely postponed his difficulty, and that in point of fact, 
this difficulty was insurmountable. But he had done his 
best; and then, with his customary candor, a candor which 
would have done credit to a trained scientist, admitted that 
this best was not well. 

Not so with his disciples, MacCulloch and James Mill. 
Ricardo's argument appealed to them as wholly satisfac- 
tory; they were unable to appreciate the difficulty which 
Ricardo himself felt with it. For is it not clear that mid- 
way between man and environment, labor and land, there 
are those modifications in environment — new items of 
environment — due to the activity which men have exerted 
in their traffic with the original endowment? Genetically 
speaking, capital is mere stored-up labor, and that part of 
the entire productive output of society that is due to capital 
is, in last analysis, it was said, rightly to be ascribed to 
labor; interest is therefore indirect wages. 

Taking the hunter illustration, Ricardo had formulated 
the argument as follows : 

Value is regulated not solely by the time and labor [directly] 
necessary, .... but also by the time and labor necessary for pro- 
viding the hunter's capital, the weapons ; [so if] the weapon neces- 
sary to kill the beaver was constructed with .... more labor 

than, etc., the beaver would be of more value than two deer 

The same principle would hold true, that the exchangeable 
value of the commodities produced would be in proportion to the 
labor bestowed on their production; not on their immediate pro- 



quickness of the returns of the circulating capital; (s) the quantity 
of foreign commodities used in manufactures ; (6) the acknowledged 
effects of taxation; (7) and the almost universal prevalence of rent 
in the actual state of all improved countries ; . . . . it is certainly not 
the quantity of labor which has been employed in the production of 
each particular commodity which determines their relative values in 
exchange, at the same time and at the same place (Malthus, op. cit., 
pp. 104, 105). Ricardo acknowledged all this, but the claim that 
rent," etc. — Whittaker, op. cit., p. 85. 



38 VALUE AND DISTRIBUTION 

duction only, but on all those implements or machines required to 
give effect to the particular labor to which they were applied;" 

and he enumerates as among these other applications of 
labor, 

a portion of the labor bestowed on building the ship in which it 
[the cotton — taking the stocking industry as an example] is con- 
veyed, .... a portion of the labor of the engineer, smith, and 
carpenter who erected the buildings and machinery, .... and 
of many others whom it is unnecessary further to particularize. 
The aggregate sum of these various kinds of labor determines the 
quantity of other things for which these stockings will exchange, 
while the same consideration of the various quantities of labor, 
which have been bestowed on these other things, will equally 
govern the portion of them which will be given for stockings." 

And to show that these same concltisions apply to the com- 
modities exchanged against the stockings, he inquires what 
effect would be felt upon prices, if any of the labor 
processes were shortened. 

But in paragraph 17 of the same section he finds it 
necessary to take account of the influence of time; he 
recognizes that where the capitals applied are not of equal 
durability or of similar sorts, changes will be worked in 
exchange ratios — as, for example, by differences in propor- 
tions of fixed as against circulating capital, subsistence 
goods, etc., where time becomes an important element in 
fixing profits on stock. And he points out that if different 
commodities require different proportions of labor and 
capital in their production, changes in the value of labor 
must affect one commodity more than another. 

But note that while this might appear to regard labor 
not only as an equalizer and leveler of exchange values, 
but also as somehow independent and as possessing in its 
own right a value in such wise as to make it definitely and 
ultimately a cost, this would not be a fair interpretation of 
Ricardo's position. He is reasoning merely that as sheer 
matter of time and of the corresponding interest charges, or 

^^ Op. cit., chap, i, sec. 3, pars. 14, 15. 
^Ibid., par. 15. 



RICARDO 39 

as a question of some departure — due perhaps to changing 
conditions with lapsing time — of the fixed capital from the 
value level of its labor cost, which departure he does not 
attempt to explain, or through changes in wage require- 
ments, due, we will say, to subsistence influences, — com- 
modities may differ in exchange value, because of the larger 
or smaller share of fixed-capital outlays as compared with 
wage outlays, or of fixed-capital outlays as compared with 
circulating-capital outlays. And labor, as he often says, 
may vary both in exchange and in ratio value. But this 
variability, as Ricardo thought of it, is especially of the 
ratio sort; but in any event this variation in the relative 
share in the productive output must be allowed for by 
employers in combining labor and capital as productive 
agents, precisely because a difference in cost must obtain 
with different combinations of these agents. And thus it 
appears that labor and capital, while they may have been 
shown to be homogeneous in origin, are not necessarily 
under this argument reducible to labor homogeneity for 
purposes of cost computations. 

It is worthy of remark that Ricardo does not at this 
point very closely distinguish how much of his difficulty is 
due to time, as it expresses itself in interest charges, as 
against time as offering opportunity for changes in the 
exchange value of labor or in the exchange value of the 
capital goods — ^machines, buildings, etc. — or in the ratio 
value of labor and capital — wages and profits. 

James Mill, however, approached the problem without 
misgiving and left it in entire contentment : This reduction 
of capital and labor to homogeneity may, he says, be 
attempted either (i) by the method of reducing labor to 
terms of capital, or (2) by reducing capital to terms of labor. 
The first method is declared impracticable; true, the capi- 
talist pays the wages of labor and reckons the wage pay- 
ment as a capital outlay ; but this is only to say that laborers 
and capitalists in co-operation have produced the com- 



40 VALUE AND DISTRIBUTION 

modity in question [as technologically they have, but as 
cost-wise they have not], and that the product should 
belong to them both, except for the fact that one partner 
has bought out the other before the returns are in; this, 
however, it is said, does not transform the case into a 
production by capital alone. 

The second method of arriving at homogeneity is 
accepted upon the line of argument falteringly and dubi- 
ously worked out by Ricardo. But how about the diffi- 
culty as to time interest? Interest, Mill replies, is merely 
the slow payment for the wearing-out of capital; all the 
partial payments will equal the whole value of the stored- 
up labor. But even so. Mill asks, what shall be said of the 
increase which comes with time to the value, say, of wine? 
Where is the labor in this? There is no more capital by 
which to explain the increase. "It is no solution to say that 
profit must be paid, because this only brings us to the ques- 
tion, why must profit be paid?" This must be because the 
capital applied elsewhere, e. g., upon the land, would 
during the same time have earned a profit, and so must 
have a profit here. The wine which works is like a 
machine which works without superintendence, and pay- 
ment for the work of the machine is really payment for 
the work which made it.^^ 

And so, having said nothing of why the capital would, 
in agriculture, have had any better right to command inter- 
est, he dallies sentence-long with the principle of oppor- 
tunity cost, and finally, having reduced the working of 
wine, and logically as well the energy of all the winds and 
tides, and, indeed, of every labor of the whole universe 
groaning and travailing in pain together, to terms of 
human labor, goes on his way unafraid and rejoicing. 
And so with MacCulloch, though not quite so humorously so. 

But with Ricardo the petrified-labor interpretation of 
capital was not completely satisfactory. In his corre- 

** James Mill, Elements of Political Economy, chap, iii, sec 2. 



RICARDO 41 

spondence with MacCulloch," he regretfully admits, but 
none the less stoutly argues, that exceptions must be recog- 
nized to the general doctrine of proportionality between 
exchange value and labor cost ; but 

all the exceptions to the general rule come under the one of time — 
I sometimes think that if I were to write the chapter on value again 
which is in my book, I should acknowledge that the relative value 
of commodities was regulated by two causes instead of one, 
namely by the relative quantity of labor necessary to produce the 
commodities in question, and by the rate of profit for the time 

that the capital remained dormant I am not satisfied, as I 

have often told you, with the account I have given of value, 
because I do not know exactly where to fix my standard/'' 

[He is] sure that the general idea is right, [but] I cannot get 
over the difficulty of the wine which is kept in the cellar for 
three or four years, or that of the ash tree which perhaps originally 
had not 2s. expended upon it in the way of labor, and yet comes to 

be worth iioo There is no difficulty in measuring all this in 

a standard such as ours, but the difficulty is in showing why we 
fix on that measure, and in proving it to be, what a measure of 
value must be, itself invariable." 

And on August 2, 1823, Ricardo wrote to Malthus: 

As far as I have yet been able to reflect upon MacCuUoch's and 
Mill's suggestion, I am not satisfied with it. They make the best 
defense for my measure, but do not really get rid of all the objec- 
tions. I believe, however, that though not without fault, it is 
the best {ibid., p. 160) . 

That is to say, Ricardo believed that the variations due 
to capital influences are, in short-time adjustments, rela- 
tively unimportant, labor thereby remaining "for many 
commodities a fairly good standard, and with many more 
an excellent standard." 

And now, very briefly, attention must be called, not to 
the confusion of cost concepts involved in including inter- 
est in cost while excluding rent, for this has already occu- 
pied us overlong, and will later call for still more of time 

^* Publications of the American Economic Association (J. H. Hol- 
lander), Vol. X, Nos. 5, 6, pp. 70, 71, 177, 178. 
" Ibid., p. 96. 
^^ Ibid., p. 153. 



42 VALUE AND DISTRIBUTION 

and attention, but to the confusion of capital concepts 
necessarily associated with this cost discussion. How much 
of truth is there, for example, in James Mill's notion that 
labor cost cannot be translated into capital terms, since, 
despite the fact that the employer must reckon his wage 
payments as capital outlays, it remains true that both capi- 
tal and labor have co-operated to produce the value in 
question, capital having simply bought out the laborer 
before the goods are marketed? And if it is true that the 
production was not by capital alone, but by capital and 
labor in co-operation, is this equivalent to asserting that in 
point of cost the production process was shared? And if 
so, in what sense are these co-operating costs commensu- 
rable and homogeneous ? The employer has incurred outlay 
and abstinence costs, and possibly, also, as Mill blunders 
into recognizing, opportunity costs. As for the wage- 
earner, he has undergone his labor burden, and having 
received his wages therefor, would appear to have disap- 
peared, for the purposes in hand, from the cost reckoning. 
His wages, while costs to his employer, are not cost, but 
compensation to himself. To the employer they are not 
pain quantities, but outlays, and as such enter for him into 
the cost reckoning solely under the capital denominator. 
And his are the only costs which have to do with the sale 
aspect of the goods. The truth is that, under competitive 
production, costs are mostly outlay costs, and, whether out- 
lay or other, are mostly or entirely reduced to the capital 
denominator,^'' 

This is the sense in which Ricardo and Mill were, for 
the time being, using the term capital, viz., in the com- 
mercial, competitive, acquisitive sense, inclusive of moneys, 
credits, supplies, in short all forms of labor-employing or 
gain-acquiring funds. But this is not at all the sense in 
which the capital notion must sound, if anything is to be 
done with the proposition that capital is stored-up labor in 
such wise that interest may thereby be conceived as redu- 
cible to wages. For in the competitive-acquisitive sense, 
capital, so far at least as it is of the circulating sort, is 
something that is constantly changing its form ; it is merely 
basis for expenditure, and may be invested in labor or in 
materials, or as the hire of capital goods, or as interest on 

" But outlay costs themselves express in turn one aspect of 
opportunity cost, or may do so, viz., the value of the agents in hand 
for their best alternative application; but all this must wait its time. 



RICARDO 43 

credit loans, or as rent of land, or for that matter in pretty 
much anything else; that is to say, it is a form of capital 
not at all corresponding to capital taken in the techno- 
logical sense, as one of the three primary categories of 
socially productive factors, but is a form now labor, now 
land, now materials, now machinery, now subsistence 
goods, everything by turns and nothing long, with only 
one unifying and constant characteristic, that it is all the 
while a basis of charge in the individual computation of 
costs, thereby a competitive category of the purest quality. 
And, indeed, it may as well be noted in passing, that this 
tripartite division of productive agents is (i) purely social, 
(2) purely technological. Competitive society has entirely 
different categories. But the various concepts of capital 
must await their turn for discussion ; see chapter xi. 



CHAPTER IV 

SENIOR 

Any other cause limiting supply is just as efficient a cause of 
value in an article as the necessity of labor in its production. And, 
in fact, if all the commodities used by man were supplied by nature 
without any intervention whatever of human labor, but were sup- 
plied in precisely the same quantities that they now are, there is no 
reason to suppose either that they would cease to be valuable, or 
would exchange in any other than the present proportions.'^ 

No writer of the cost school is fairly to be charged 
with overlooking the fact that utility is a fundamental 
condition to the existence of value; utility and the market 
demand resting upon it are merely assumed — taken for 
granted — as reasonably going without saying. But water 
and wine, iron and gold, etc., are taken as cases demon- 
strating that the fixation of value — all the while inside the 
limits set by utility — must be found on the cost side of the 
value investigation. True, there are goods of a distinctly 
scarcity sort, but these Ricardo and his associates left out 
of the reckoning, as exceptional in quality and relatively 
unimportant in volume; the investigation confined itself 
mostly or entirely to cases of freely reproducible goods. 

But Senior has something to add here; he puts the 
causes of value as utility and scarcity. Ricardo, less accu- 
rately, had said: "Possessing utility, commodities acquire 
value from two causes, labor and scarcity." - 

But evidently the truth was with Senior; the necessity 
for the labor is in the scarcity; labor and scarcity point to 
one and the same fact. If goods were supplied gratui- 
tously but in precisely the same quantities as now, the 
exchange relations would be in no wise affected; the labor 
requirement is purely an influence affecting the supply side 
of the value equation. 

'Senior, Political Economy, 6th ed. (London), p. 24. 
^ Op, cit., chap, i, sec. i, par. 3. 

44 



SENIOR 45 

Ricardo had regarded labor cost, in the pain aspect, as 
the essence and ultimate significance of real value, but had 
regarded exchange value not as a question of labor content 
but only of proportion to labor content. And he had 
found infinite difficulty in getting interest costs into this 
formulation — to say nothing of rent. Senior purports to 
find a solution for this perplexity. Homogeneity between 
capital cost and labor cost can, to his thinking, be worked 
out through his discovery of abstinence pain as the condi- 
tion to which the existence of capital is subjected. There- 
by labor and saving are conceived to be reducible to a 
common denominator of pain. 

Just how much this doctrine would have profited 
Ricardo is not altogether clear. It is to be remembered 
that Ricardo employed pain cost only as, in terms of 
ultimate content, the explanation of real value; and so far 
as real value was concerned, he was not conscious of 
needing more for the further strengthening of his doc- 
trine. Exchange values were not, in his view, a question 
of pain cost in any other sense than that, through wage- 
cost outlays, exchange values become proportional to 
labor pains. But could he not have made exchange value 
a proportion resting upon the combined pain of labor and 
of abstinence? 

Recalling, however, that Ricardo worked out his doc- 
trine only through the medium of outlay cost, as a question 
of employers' wage expenditures, and was able to formu- 
late his proportion only upon the assumption of such 
homogeneity in labor as would require employers to pay 
wages for it in precise proportion to its quality of burden, 
it becomes evident that capital-saving, pain of abstinence, 
can be fitted into the proportion only upon the twofold 
assumption, (i) that saving is homogeneous in pain qual- 
ity so that interest payments can be safely regarded as pro- 
portionate to savings pains, and (2) that savings pain and 
labor pain are in such wise homogeneous that labor pain 
and savings pain command equal remuneration per unit of 
pain. But whether or not, in close analysis, all this would 
have turned out to be thoroughly practicable, it is certain 
that Senior himself did not attempt the necessary analysis; 
nor is it clear that he adopted Ricardo's distinction between 
real value and exchange value. 



46 VALUE AND DISTRIBUTION 

Senior makes labor and natural agents the primary 
factors of production; abstinence, while not primary, is 
none the less important: 

The power of labor and of the other instruments which 
produce may be indefinitely increased by using their products as the 

means of further production By the word abstinence we 

seek to express that agent, distinct from labor and the agency of 
nature, the concurrence of which is necessary to the existence of 
capital, and which stands in the same relation to profit [interest] 
as labor does to wages. ° 

And plainly enough, from the point of view of laborer 
and saver — in purpose and possibly in moral deserving — 
interest is the reward of abstinence as wages are the reward 
of labor. But equally plainly, from the point of view of 
borrowers and employers, this identity of relation does not 
hold; wages are paid for the services of labor as a pro- 
ductive agent ; interest is not paid for the services of absti- 
nence as productive agent, but for the services of capital. 

To the objection to calling abstinence an active agent 
of any sort. Senior replies : "To abstain from the enjoy- 
ment which is within our power, or to seek distant rather 
than immediate results, are [sic] among the most painful 
exertions of the human will." * 

However, even if it be true that abstinence is painful, 
this is world-wide from showing that it is productive, and 
still farther from showing that remuneration according to 
productiveness and remuneration according to pain fulness 
must lead to one and the same result. But in point of fact 
it is not clear that abstinence is an independent fact of 
pain. When one has produced wealth the question before 
him is when and how to spend it; the wealth is a good 
thing to have; whatever grief there may have been in its 
getting is all past, and the time for the other side of the 
account has arrived. How to take one's enjoyment, the 
manner as well as the time of it, may be a puzzlesome 
matter and may give occasion to a deal of doddering. And 
it is true that the abstinence may involve the denial of 
satisfaction to a present and pressing want; it is equally 
true, however, that the choice may lie between positive 

' Senior, op. cit., p. 59, 

* Senior, op. cit., p. 59. Precisely in the same sense and for the 
same argumentative end, Courcelle-Seneuil uses the term travail de 
I'epargne. 



SENIOR 47 

gratifications; it would be a waste of sympathy to grieve 
with one who has to choose between two pleasures, and to 
call either pleasure a pain because it is conditioned on 
going without the other pleasure. The term sacrifice 
might be serviceable here for expressing the truth of the 
case, though the cost argument, as one of pain, would 
not thereby be greatly strengthened. But all of this has, 
of course, nothing to say as to the proposition that, with- 
out some compensation, the considerations making for 
present as against deferred enjoyment might be the stronger, 
and the saving fail to take place: nor is anything to be 
inferred as to this or any other justification, mor- 
ally speaking, for the receipt of interest. But, in itself, 
abstinence is not pain, and may not remotely imply pain; 
it is often only one of the different data in a choice between 
pleasures. Whether or not, were it always a pain, it could 
be reduced to a common denominator with labor pain is, 
therefore, not a pressing problem. 

Bearing in mind the sense in which Senior stands for 
the proportionality of value to cost, there need be no sur- 
prise in meeting his assertion that neither profits nor 
wages are costs, but only abstinence and labor.^ 

In a sense and as bearing on the concept of real value, 
Ricardo would have assented to this; and as bearing on 
market value also, Ricardo would have been keen to insist 
that wages and interest are not ultimate determinants of 
value but only that values are proportioned to them ; but it 
would have sounded strange to Ricardo to hear it denied 
with reference to market value that wages and interest are 
costs. This doctrine of Senior is, in fact, a definite aban- 
donment of the notion of outlay cost;® his doctrine of pro- 
portionality does not perhaps thereby of necessity fail, but 
it certainly awaits the making of its case. If labor and 
abstinence cannot be made homogeneous and commensu- 
rable as items of pain cost — and particularly, if abstinence 
(or, for that matter, labor) is not necessarily a pain cost at 

"Senior, op. cit.j p. loo. 

• "Want of the term sacrifice, or of some equivalent expression, has 

led Mr. Malthus into inaccuracy of language When he termed 

profit a part of cost of production, he appears to have meant, not 
profit, but that conduct which is repaid by profit ; an inaccuracy pre- 
cisely similar to that committed by those who term wages a part of the 
cost of production ; meaning not wages, which are the result, but the 
labor for which wages are the remuneration." — Senior, op. cit., p. loo. 



48 VALUE AND DISTRIBUTION 

all, and if the common denominator of market value under 
the entrepreneur outlay-cost analysis is abandoned, it only 
remains to wonder what the solution will be. 

But after all. Senior has a proportion doctrine ; he says : 
When the only valuable agents employed are those which are 
universally accessible and are therefore practically unlimited in 
supply [that is, when there is neither capital nor land, or where 
there are unlimited capital and land, and so no differentials of 
advantage], the utility of the produce, or, in other words its 
power [in exchange?], must be in proportion to the sacrifice made 
to produce it, ... . since no man would willingly employ a given 
amount of labor or abstinence in producing one commodity, if he 
could obtain more advantage by directing them .[it] to the produc- 
tion of another.' 

This is one of Senior's italicized theorems; it is to be 
objected that there is no reason why the utility of products 
should be proportional to the sacrifices of production, 
unless upon the assumption not only of the homogeneity 
of labor pain, but also of the reduction of utility to a mar- 
ginal basis. Otherwise it must merely be true that, if a 
producer could, with a given sacrifice, produce something 
of greater utility than the thing in hand, he would change 
his direction of production. 

But in essentials Senior's doctrine is really a doctrine 
of opportunity cost — requiring, however, some modifica- 
tion. Opportunity cost may as well lie in some alternative 
between pleasures or benefits, as between pains or burdens ; 
at the day's-end margin, labor may be still a pleasant thing, 
and yet be abandoned, if only the attractiveness of recrea- 
tion be such as to outweigh the pleasures of the labor 
process taken in conjunction with the advantages of the 
resulting product. Among those different possibilities of 
activity in which products outweigh burden, that one will 
be selected in which the ratio of product to effort is most 
favorable, or, more accurately, in which the surplus of sat- 
isfaction is greatest.® The opportunity cost involved in 
the case would be found in the advantages of that course 

' Senior, op. cit,, p. 97. 

* Patten and Clark have, perhaps, best elaborated this truth. And 
it may be remarked that this also is not quite accurate ; we are not 
necessarily committed to any homogeneity-and-quantity calculus of 
pleasure. All of the requirements of the case would be met — and 
better met — ^by substituting the clause : in zvhich the surplus of satis- 
faction is the most desirable. 



SENIOR 49 

of activity between which and the selected course the prob- 
lem of choice was actually presented — that is, in the most 
attractive course among the competing and vanquished 
alternatives. 

But Senior makes it clear that commodities may be of 
sorts that cannot be reproduced, or that can be had only at 
remote and uncertain intervals; here the values "are sub- 
ject to no certain rule, and depend altogether on the wealth 
and taste of the community." ® That is to say, the supply 
term being inelastic, the value is left to be determined by 
the utility, or by the demand, or, at all events, by some- 
thing taken for granted and unanalyzed on the demand 
side. But, for most commodities — ^the kind that we are 
considering — "the obstacle to the supply .... con- 
sists .... in the difficulty of finding persons ready to 
submit to the labor and abstinence necessary to their pro- 
duction. In other words, the supply is limited by the cost 
of production." ^° 

Here it is evident that Senior abandons the opportunity 
computation and goes back to pain cost. For with him 
abstinence is not intended to carry its possible implication 
of the foregoing of products alternatively producible. He 
is talking about the grief and groan of saving and the 
burden and backache of labor; and in this absorption he 
neglects to ask himself the very simple question why in 
actual society so many men are indisposed to enter the 
business of hat production. Is it really true that the dis- 
comforts of the occupation are an adequate explanation of 
the facts? 

Senior admits that, to be accurate for short periods, 
his cost doctrine must presuppose perfect mobility in capi- 
tal and labor ; but it is to be noted that even this inadequacy 
would disappear if his doctrine of cost really rested on the 
sacrifice of alternative opportunities. But admitting these 
temporary variations, he reflects : 

Political Economy does not deal with particular cases, but 
with general tendencies; and when we assign to cost of production 

• Op. cit.j p. 97. 
^Jbid., p. 97. 



50 VALUE AND DISTRIBUTION 

the power of regulating prices in cases of equal competition, we 
mean to describe it not as a point to which price is attached, but as 
a center of oscillation which it is always endeavoring to approach." 

And then he goes on to show that production in which 
no appropriated natural agent has been concerned is the 
only case of perfectly equal competition; all others are 
cases of monopoly more or less marked. 

Just why, from the point of view of outlay cost — the 
only tenable point of view for the proportion doctrine — it 
should be alleged that free competition fails, so long as, on 
terms of paying the market charge, all competitors have 
equal opportunity of enjoying the advantages attending 
the control of appropriated natural agents, is not clear, 
though it is clear enough from the point of view of pain 
cost. But Senior makes full and frank admission that, in 
actually existing conditions, his doctrine of pain cost leads 
nowhere, so far as explaining market values is concerned; 
he has arrived at the very impasse that Ricardo faced : 

It is difficult to point out an article, however simple, that can 
be exposed to sale without the concurrence, direct or indirect, of 
many hundred, or, more frequently, of many thousand, different 
producers, almost every one of whom will be found to have been 
aided by some monopolized agent. There are few things of which 
the price seems to consist more exclusively of wages and profits 
than a watch [MacCulloch's favorite example] ; but if we trace 
it from the mine to the pocket of the purchaser, we shall be 
struck by the payment of rent .... at every stage of its progress. 
Rent was paid for the privilege of extracting from the mines the 
metals of which it is composed; for the land which afforded the 
materials of the ships in which those metals were transported to 
an English port; for the wharves at which they were landed, and 
the warehouses where they were exposed for sale; the watch- 
maker pays a rent for the land covered by his manufactories, and 
the retailer for that on which his shop is situated. The miner, the 
shipwright, the housebuilder, and the watchmaker, all use imple- 
ments formed of materials produced by the same processes as the 
materials of the watch, and subject also in their different stages to 

similar payments of rent When we speak, therefore, of a 

class of commodities as produced under circumstances of equal 
competition, or as the result of labor and abstinence, unassisted 
by any other appropriated agent, and consider their prices as equal 

" Op. cit.j p. 102. 



SENIOR 51 

to the sum of wages and profits that must be paid for their pro- 
duction, we do not mean to state that any such commodities exist 
but that, if they did exist, such would be the laws by which their 
prices would be regulated." 

All of which may fairly be described as a dissertation, by a 
great labor-value authority, upon how labor does not regu- 
late value. But note that by some method of swift trans- 
formation the point of view has now become that of 
competitive-outlay cost, and that rent as well as interest 
outlays are now included in the charges that go to make up 
market price. 

Nevertheless, Senior in his discussion of rent implies 
his acceptance of the Ricardian doctrine that rent is not a 
part of value-regulating cost. Still it must be said that he 
does not so declare in terms; he does, however, point out 
that Ricardo, in his controversy with Say, committed the 
fault of inaccuracy; Ricardo should have made his stand 
for price-determining cost at the intensive margin. And 
with this amendment Senior appears to acquiesce in the 
Ricardian doctrine, so far as it asserts that price tends to 
coincide with the cost of that part of the product pro- 
duced at the greatest expense : nor does he seem to recog- 
nize that, from the point of view, not of social, but of outlay 
cost, there is no reason why costs on better land should 
be either greater or smaller than costs on poorer or on 
marginal land. 

But there is possibility or misinterpreting Senior at this 
point — for it is hard to see how he can regard interest as 
a value-determining cost and still exclude rent. For he 
makes it clear that the distinction between rent and interest 
ceases to have significance, as soon as the capital has 
become the property of someone to whose exertions and 
abstinences it did not owe its origin. And he rightly 
remarks that there is, of course, abstinence in not selling 
property, of no matter what sort or origin, and in not 
spending the proceeds in current enjoyment. Evidently, 
however, if this were fully worked out, all rent would 
become interest. And Senior finds also great difficulty in 

"Op. cit.^ pp. 1 12-14, passim. 



52 VALUE AND DISTRIBUTION 

drawing the line between wages and rent, and inclines to 
regard as rent all cases of extraordinary compensation for 
unusual ability.^^ 

" "We may be asked, then, whether the improvements which form 
the greater part of the value of the soil of every well-cultivated district 
are all, and forever, to be termed capital ; whether the payments 
received from his tenants by the present owner of a Lincolnshire 
estate, reclaimed by the Romans from the sea, are to be termed not 
rent, but profit on the capital which was expended fifteen hundred 
years ago. The answer is, that for all useful purposes the distinction 
of profit from rent ceases as soon as the capital, from which a given 
revenue arises, has become,.whether by gift or by inheritance, the property 
of a person to whose abstinence and exertions it did not owe its creation. 
The revenue arising from a dock, or a wharf, or a canal, is profit in 
the hands of the original constructor. It is the reward of his absti- 
nence in having employed capital for the purposes of production instead 
of those of enjoyment. But in the hands of his heir it has all the attri- 
butes of rent. It is to him the gift of fortune, not the result of a 
sacrifice. It may be said, indeed, that such a revenue is the reward 
for the owner's abstinence in not selling the dock or the canal and 
spending its price in enjoyment. But the same remark applies to every 
species of transferable property. Every estate may be sold, and the 
purchase money wasted. If the last basis of classification were 
adopted, the greater part of what every Political Economist has termed 
rent must be called profit." — Op. cit., p. 129. 

Professor Whittaker does not appear to experience the difficulty 
that I have met in interpreting Senior's position as to the relations of 
rent to cost. To me it seems impossible, upon any classical level of 
discussion, to include rent payments within pain cost ; it is equally diffi- 
cult to exclude rent payments from outlay costs, unless the distinction 
is set up between value-determining and value-determined costs. 
Whittaker writes (Whittaker, op. cit., pp. 102-4) : 

"According to Senior, land rent enters into price. So far both 
'profits' of stock and rent of land exist to destroy the proportionality 
of values to labor cost. This is the result to which Malthus' criti- 
cism of Ricardo led. But Senior's criticism goes beyond Malthus'. 
Wages, as an element in entrepreneur's cost, are not even in proportion 
to the labor remunerated. That is to say, that is what Senior says, 
if we keep his thought while reforming his language. He states that 
the actual income, which we always call wages, is really composed in 
many cases of wages, profits, and rent. He says this because he wishes 
to define wages as that remuneration which is in proportion to sacri- 
fice Senior's rent to skill is really an excess of wages over the 

amount required to be in proportion to disutility" (pp. 102, 103). 

"Piecing together for ourselves what Senior says, it is his position 
that the value of commodities must include (if the commodities are to 
be produced) rent, profits, and wages ; rent and profits, being different 
percentages in the whole entrepreneur's cost of different goods, make 
values out of proportion to labor cost ; there is no necessity of consid- 
ering profits as an element in entrepreneur's cost approximately in pro- 
portion to wages ; and lastly, wages are not in proportion to labor, 
which is disutility" (p. 104). 



CHAPTER V 
JOHN STUART MILL 

With John Stuart Mill the transition is approxi- 
mately complete to the point of view of entrepreneur 
cost. 

We need delay long neither upon his doctrine of the 
determination of wages — the wage- fund theory for short 
periods, and the population-subsistence doctrine for long- 
time tendencies — nor upon his determination of interest 
payments according to the cost-abstinence analysis as 
related to the supply of capital; no matter how these 
outlays get determined, it is sufficient, for present pur- 
poses, to note that, accepting them as the market gives 
them, Mill treats them as items of outlay cost, and finds 
market values to be fixed according to the law of costs as 
formulated in the entrepreneur sense — but all the while 
with two modifications, one of addition and one of sub- 
traction : for, following Ricardo's doctrine, rent is made 
no part of price, and wages of superintendence, as an 
element in minimum profit, are included in price. Mini- 
mum profit is defined as "that which is barely adequate, 
at the given place and time, to afford an equivalent for 
the abstinence, risk, and exertion implied in the employ- 
ment of capital." ^ After covering all outlays, and after 
remunerating the capitalist owner for forbearing to con- 
sume, there must be something left to recompense the 
labor and skill of the person who devotes his time to the 
business; but how much? The amount is variable 
depending on the amount necessary to compensate the 
abstinence, and still more variable to compensate the 
risk. "That portion, too, of the gross profit which forms 
the remuneration for the labor and skill of the dealer or 

^ John Stuart Mill, Principles of Political Economy, Book II, chap, 
XV, sec. 2. 

S3 



54 VALUE AND DISTRIBUTION 

producer is very different in different employments." ^ 
Mill does not say why, but cites apothecaries as an exam- 
ple of a trade where "a considerable amount of labor and 
skill is required to conduct a business necessarily of limited 

extent A higher than common rate of profit is 

necessary to yield only the common rate of remunera- 
tion After due allowance is made for the various 

causes of inequality" giving greater or less wages of super- 
intendence or of risk, "the rate of profit [interest] on capi- 
tal in all employments tends to an equality." ^ 

There is certainly no hint of opportunity cost here; so 
far as any determinant of minimum profit is indicated, it is 
one of pain or burden. But at any rate, as it is elsewhere 
said, "the cause of profit is that labor produces more than 
is required for its support." * 

Still it is not clear whether this phrase, "required for its 
support," points to a minimum-of-subsistence principle, or 
to a standard-of-living principle, or whether the proposi- 
tion is a mere mathematical truism. "The reason why 
capital yields a profit is because food, clothing, materials, 
and tools last longer than the time which men take to pro- 
duce them:" so that there is a surplus to the capitalist. 
This might appear to look toward some subsistence doc- 
trine, if only Mill had not elsewhere repudiated that doc- 
trine, — at all events for short-time adjustments, — setting up, 
instead, the capital limitation and wage- fund determination : 
but the better interpretation seems to be merely that, prod- 
ucts having exceeded outlay, there is a remainder left over 
for the employer. "If the laborers of the country collect- 
ively produce twenty per cent, more than their wages, 
profits will be twenty per cent., whatever prices may or may 
not be." ^ This is Ricardo's ratio idea. 

Outlays for materials and implements are resolved into 
wage payments : "he thus repays to a previous producer the 
wages which that previous producer has paid." ^ True, 
there is a profit with it, but had the present em- 
ployer produced these supplies for himself, there would 

^Mill, op. cit.j sec. 3. ''Ibid., sec. 5. 

" Ibid., sees. 3, 4. * Ibid., sec. 6. 

* Ibid., sec. 5. 



JOHN STUART MILL 55 

also have been, to be reckoned in the cost, a profit for him- 
self (but how much is again not said) ; and so in the sum- 
ming up, "all the advances have consisted of nothing but 
wages," excepting what have already gone for profit. 
Note that profit in Mill's use here includes not only interest, 
but something more than interest, something for superin- 
tendence and risk. 

The gains of the capitalist employer depend, then, on 

the magnitude of the produce; .... secondly, the proportion of 
that produce obtained by the laborers themselves; the ratio — the 
rate of profit, the percentage on the capital — depends on the 
second of the two elements, the laborers' proportional share, and 
not on the amount to be shared Wt thus arrive at the con- 
clusion of Ricardo and others, that the rate of profit depends on 

wages However, .... instead of saying that profits 

depend on wages, let us say — what Ricardo really meant — ^that 
they depend on the cost of labor.'' 

It is well to note in passing that this was not what 
Ricardo meant: Mill is hesitatingly and gradually deserting 
the doctrine of relative shares in the product — the ratio- 
value concept — and is going over to the notion of profit, 
not as fraction but as absolute residuum, — surplus above out- 
lay : "What labor brings in to the laborer and what it costs 
to the capitalist, are ideas quite distinct, and which it is of 
the utmost importance to keep so." ^ True, there are all 
levels of wages, but if at the same time the efficiency is of a 
sort to correspond, the cost of labor to the capitalist may be 
no greater. 

And note again that there is still nothing here about 
causes; the reasoning is entirely mathematical; the prob- 
lem is not treated as distributional in the sense of looking 
for the ultimate forces of determination, and one is left 
to wonder how, efficiency remaining the same, etc., the 
wages should so rise or fall, or why the supplies which the 
laborer buys with his wages become more or less costly. 
If one resorts to the wage-fund doctrine for help, he is 
confronted by the suspicion that this doctrine also is merely 
mathematical, and as such, is a truism. Thus far, then, the 
entire discussion has amounted to a descriptive treatment 
of wages, interest, and profits, as elements entering into 
cost of production; and so far as the exposition has yet 

''Ibid., sec. 7. ^ Ibid., sec. 7. 



56 VALUE AND DISTRIBUTION 

proceeded, these remunerations stand as ultimate opaque 
unyielding facts, unexplained and irreducible data, furnish- 
ing the basis for entrepreneur cost. 

Turning now to Mill's formal discussion of value in 
the chapter under that caption, and especially to his dis- 
cussion of "Cost of Production in Its Relation to Value,"^ 
we find it said that value, no matter under what law of 
return, is always the result of demand and supply. The 
minimum price must be sufficient to pay the cost and the 
ordinary expectation of profit, else capitalists will not go 
on producing the commodity. 

Note that profit is here treated as something over and 
above cost, cost being regarded as substantially the equiva- 
lent of expenditure. "They will not even go on producing 
at a profit less than they can live upon" — seemingly a doc- 
trine of subsistence minimum for employers; but what will 
they do instead? Doubtless, as it is said, they may submit 
to temporary loss in hope of better times, but, broadly, "the 
cost of production together with the ordinary profit may be 
called the necessary price." 

And here, again, we remark there is as yet nothing to 
indicate how much must be this necessary profit, or what 
are the ultimate forces in its determination. But Mill 
shows that by the influence of prices upon the outflow and 
inflow of capital, profits are always tending toward equal- 
ity; and precisely this trend toward equality is presented 
as the guarantee that things will exchange against one 
another in the ratio of their costs. Perhaps, after all, this 
may, for present purposes, be accepted as a sufficient 
explanation for the determination of profits, so far as 
profits are held to mean interest only ; but as so under- 
stood, the doctrine, fully worked out, will resolve itself into 
a case of opportunity cost. 

Mill's "Ultimate Analysis" " is most difficult of ade- 
quate summary or even pf fair paraphrase. 

Tracing capital to its ultimate origins, ]\Iill finds that 
labor is "so much the principal cost of production as to be 

' Mill, op. cit.. Book III, chaps, i-iv. 
" Mill, op. cit., Book III, chap. iv. 



JOHN STUART MILL 57 

nearly the sole cost." And so it is approximately accurate 
to resolve interest into wages ; so cost, as regarded from 
the employer's point of view, is a question of wage out- 
lays, — wages, and not labor, being from this standpoint the 
basis of cost. But wages are cost only as modified by 
considerations of efficiency, that is, only with reference to 
the quality and quantity of product. In substance, the doc- 
trine is that a given sum of products costs the wages 
directly or indirectly paid out to produce it. But, after all, 
values of commodities are exchange relations of commodi- 
ties with one another ; values are, then, purely relative ; and 
therefore costs of production as bearing on value are not 
absolute but relative quantities. So value relations are 
independent of influences of cost, whether of rise or of fall, 
if only the commodities under comparison are proportion- 
ally affected. "Otherwise, there could be no such thing 
as a real rise of wages ; for if wages could not rise without 
a proportionate rise in the prices of everything, wages could 
not rise at all." But if wages are higher in one industry 
than in another, values will be affected through costs. 

Note that these differences in wages are not explained 
as due to differences in the values of the products ; it is just 
the other way about. "Things .... which are made by 
skilled labor exchange for the products of a much greater 
quantity of unskilled labor, for no reason but because the 
latter is more highly paid." Thus there is no proportion 
of value to labor, but only to entrepreneur costs; and these 
costs are presented as causal and ultimate. "So wages do 
enter into value; the relative wages of the labor necessary 
for producing different commodities affect the value as 
much as the relative quantities of labor The abso- 
lute wages paid have no effect upon value, but neither has 
the absolute quantity of labor." But, in substance and 
effect, values are nevertheless proportional to quantity of 
labor: "In considering, however, the causes of variations 
in value, quantity of labor is the thing of chief impor- 
tance," for that varies now with one commodity and now 



58 VALUE AND DISTRIBUTION 

with another, but variations in wages are usually general, 
and thus, by the very fact of being general, have no signifi- 
cance for value. 

Note, however, that this proposition really goes no 
farther than to say that variations in value come, not 
through a rise in general wages, but through changing 
methods of applying labor to production. But changes in 
machinery and appliances are at least as frequent and as 
radical as changes purely of the labor sort; it therefore fol- 
lows that variations in values due to causes working on the 
side of profits (interest) are at least equally important with 
those working on the side of wages. 

But all of this must allow for modification through the 
bearing of profits (interest+risk-charge4- wages of super- 
intendence) on value, in so far as some industries are more 
capitalistic than others in their methods of production. 
But here also it is evident that not absolute profits but only 
relative profits have significance for exchange relations. 
And, as Mill rightly insists, profits are found to differ in 
this relative way, butchers, for example, gaining higher 
profits than bakers. And time, with its correlative of inter- 
est, also becomes of great importance, as in the aging of 
wine. 

[If to] attain the desired quality, the wine requires to be kept 
five years, the producer or dealer will not keep it, unless at the 
end of five years he can sell it for as much more .... as amounts 
to five years' profit, accumulated at compound interest. Here, then, 
is a case in which the natural values . . , . do not conform to cost 
of production alone, but to cost of production plus something else. 
Unless, indeed, for the sake of generality in the expression, we 
include the profit which the wine merchant foregoes during the five 
years, in the cost of production of the wine : looking upon it 
as a kind of additional outlay, over and above his other advances, 
for which outlay he must be indemnified at last. 

Evidently Mill is not entirely clear as to the basis on 
which this time charge is to be counted a cost, if, indeed, it 
is to be so counted at all ; in a sort, values seem to conform 
"to their costs of production plus something else. This, 
however, disturbs the general consistency of the theoreti- 



JOHN STUART MILL 59 

cal formulation ;" there may, then, after all, be nothing for 
it but to recognize opportunity cost in this exceptional case. 

Mill does not, however, in terms commit himself abso- 
lutely to this view; but "all commodities made by waiting 
are assimilated, at least approximately, to the wine in the 
preceding example." And he closes with regarding these 
time-charge items as, in the relative bearing, very impor- 
tant influences upon values, although nothing further than 
this suggestion of opportunity cost is accomplished in the 
direction of telling why. At any rate, it is clear that "in 
comparison with things made wholly by immediate labor, 
profits enter more largely into the cost of production" of 
all commodities made by machinery; whereupon there fol- 
lows an excellent example of all this, under cover of which 
the explanation meanwhile gets forgotten; which, by the 
way, is precisely as far as Ricardo got, the only difference 
being that Ricardo was perfectly aware that something 
was the matter, while Mill is not. In general. Mill appears 
to hold by pain or abstinence cost as the ultimate explana- 
tion of interest. But if neither of these things is adequate, 
perhaps, he thinks, opportunity cost may have some efficacy 
for the case.^^ 

But whatever may be the explanation, it stands for true 
that, because of the differing degrees in which production 
is capitalistic, "every rise or fall in general profits will 
have an effect on values; not, indeed, by raising or lower- 
ing them generally, but by altering the proportions in which 
the values of things are affected by the unequal lengths of 
time for which profits are due." 

But to return to the cause underlying the values of these 
cost items of outlay : In the main the explanation is found by 
Mill in the fact that these items themselves depend for their 
value on their respective costs of production. When, how- 
ever, these are not cost but scarcity values, they are equally 
and similarly carried over as costs into the value of the 
product. The typical case of this sort of cost is found with 
limited natural agents, as water-powers and the like. But 
these cases, not being marginal, have, as Mill appears to 
think, no bearing upon value. And this brings us to the 

""[With Mill] the profit of capital is stated explicitly to be the 
remuneration of abstinence, but nothing is made to depend on this. 
Abstinence is not elevated into a position logically co-ordinate with 
labor, nor are the two conceived of together as constituting subjective 
costs, as distinguished from entrepreneur's costs, consisting in profits 
and wages." — ^Whittaker, op. cit., p. io6. 



6o VALUE AND DISTRIBUTION 

question — does rent enter into cost? "No one can deny 
that rent sometimes does enter into cost of production; if I 
buy or rent a piece of land and build a cloth manufactory 
on it, the ground rent forms legitimately a part of my 
expenses of production which must be paid by the product." 

But this does not necessarily imply that the value will 
thereby be the greater, that is, that these costs are value- 
determining. And in chapter v, on "Rent in Its Relation 
to Value," Mill writes: "Rent forms no part of the cost 
of production which determines the value of agricultural 
products" — an assertion which must stand either as setting 
up an entirely indefensible distinction between agricultural 
and other products, or as imposing the conclusion that not 
all outlays involved in production may be ranked as value- 
determining costs, but only those involved in marginal 
production — which opens up questions too wide-reaching 
for present discussion, viz., whether the marginal product 
has any peculiar value-determining quality, and whether, if 
it has, we shall find this marginal item of product to be a 
marginal-man item or a marginal-land item. 

Mill, however, elsewhere says : "But when land ca- 
pable of yielding rent in agriculture is applied to some other 
purpose, the rent which it would have yielded is an element 
in the cost of production of the commodity which it is 
employed to produce," ^^ — a most important and much-dis- 
cussed admission — still, however, leaving it possible that no 
influence upon value need be inferred, if only it be defen- 
sible to distinguish between different outlays in their bearing 
on costs; or, if it be somehow possible to exclude these 
cost rents from marginal, price-determining outlays. But 
for our present purposes it is sufficient to remark that this 
case of rent cost, accepted by Mill, is distinctly an illustra- 
tion of the opportunity-cost principle. 

In point of fact, also, all this proof that cost is impor- 
tant only as relative cost is, in last analysis, merely another 
opportunity-cost doctrine. The main difference in this 
regard between Mill and Ricardo is that Ricardo attempted 
far more than did Mill in the way of explaining the reduc- 
tion of wages and interest to a basis of homogeneity, 
and of tracing the proportionality of outlay cost and of 
market value to the labor costs of real value. Ricardo 
can hardly be said to have succeeded : Mill hardly tried. 
But it is, at any rate, sufficiently evident that capital and 

" Mill, op. ctt., Book III, chap, vi, prop. 9. 



JOHN STUART MILL 6i 

labor services, under the form of interest and wages, by 
the very fact that they are producers' outlays reckoned in 
terms of money, have somehow for the purposes in hand 
been reduced to a common denominator of value. The 
sheer obviousness of it all suffices, in Mill's view, to excuse 
him from all labor of attention or examination. 

But this homogeneity being assumed as a datum, some- 
thing is done by Mill toward tracing out the determination 
of these costs, non-relatively, that is, as costs in the ordi- 
nary sense rather than as ratios or distributive fractions. 
Interest is explained as determined through abstinence as 
cost, — wages by the proportion between capital and the 
laborers employed by capital, — profit by what is left from 
price after the expenses of production are covered. 

Nor does the mechanism by which market value 
becomes proportional to outlay cost, or, more accurately, 
to entrepreneur cost as a whole — rent, however, excluded — 
receive further elucidation than is contained in the doctrine 
of the mobility of capital, which, by the way, is a simple 
application of the principle of opportunity cost. The pro- 
portionality of value to profit, so far as profit is some- 
thing other than interest, is left to be explained by 
"normals." 



CHAPTER VI 
CAIRNES 

Cairnes's special task was the rehabilitation of the labor- 
cost theory of value, after the damage visited upon it 
through the half-hearted support or the semi-abandonment 
of John Stuart Mill. In the Leading Principles Restated, 
labor cost is set up as the value determinant — not, however, 
labor cost in terms of time, but in terms of pain, burden, 
irksomeness. Nor does the doctrine appear to conceive 
labor as having in itself and in its own right, as an expres- 
sion of pain, an independent value of its own, which value 
is, as cost, carried over into the exchange value of the 
commodities produced by it. Often the thought is more 
like that of Ricardo, in recognizing, though not with full 
consistency, the principle of proportionment of value to out- 
lay cost; occasional recourse, that is to say, appears to be 
made to the mechanism of entrepreneur expenditure. But 
on the whole Cairnes's doctrine seems rather to be that of 
labor-purchase cost. 

Cost means sacrifice, .... and the problem of cost of produc- 
tion as bearing on the theory of value, is to ascertain how far and 
in what way the payment thus made by man .... in the barter 
between him and nature, determines or otherwise influences the 
exchange value of the products which result.^ 

Under Cairnes's treatment the issue between labor-pain 
cost and entrepreneur cost is for the first time in English 
economics clearly drawn. Ricardo, it is true, had worked 
out a doctrine of entrepreneur cost based upon labor cost 
as its underlying determinant, but had too often failed both 
of clarity and of strict consistency in preserving the sepa- 
rateness and the antithesis. Senior had taken the pain-cost 
point of view, but, scarcely attempting the reconciliation, 
had over and again lapsed into entrepreneur-cost analysis. 

^ J. E. Cairnes, Some Leading Principles of Political Economy 
Newly Expounded, chap, iii, sec. 5. 

62 



CAIRNES 63 

Mill, while in the main an exponent of entrepreneur cost, 
had, at fairly frequent intervals, made some more or less 
vague appeal to labor-pain cost as basis. But, whatever 
else may be said in criticism of Caimes, it must be admit- 
ted that, in full consciousness of this confusion, he sets 
himself earnestly at work to avoid it and to make the appli- 
cations and the limitations of the labor-cost doctrine clear 
and precise. 

But following upon this preliminary sketch of Cairnes's 
position, some detail of exposition and criticism is now 
called for. It is, indeed, to be admitted that as cost items, 
choice must be made between labor as against wages, and 
between abstinence as against interest: 

Of all ideas within the range of economic speculation, the two 
most profoundly opposed to each other are cost and the reward of 
cost — the sacrifice incurred by man in productive industry, and the 

return made by nature to man upon that sacrifice Cost and 

remuneration are the economic antitheses of each other; so com- 
pletely so that a small cost and a large remuneration are exactly 
equivalent expressions.* 

But if, on the other hand, wages and profits are to be 
accepted as the ultimate items, costs, as Cairnes argues, 
must increase as product increases, since wages and prod- 
ucts increase with product and exhaust the product; an 
increase in the general productiveness of industry would 
require 

that wages and profits .... as an aggregate would rise exactly 
in proportion as industry had become more productive, and the cost 
of producing a given commodity, measured in wages and profits, 

would then remain precisely as before There would be less 

labor and abstinence exerted, but this smaller exertion being more 
highly remunerated, the cost, measured in the remuneration, would 
suflFer no change: (ibid.) 

all of which, it is to be remarked, is equally serious for 
labor as the value determinant; costs, from any point of 
view, are significant, for value purposes, only as ratios, as 
purely relative facts. 

* Cairnes, op. cit., chap, iii, sec. 3. 



64 VALUE AND DISTRIBUTION 

But that solely in this relative sense are entrepreneur 
costs conceived by Mill to be relevant to value is not appre- 
ciated by Cairnes ; though he later makes it quite clear that 
in no other than this relative sense has labor cost any bear- 
ing on the case.^ 

But his objection to the wages-and-profit method of 
explanation goes deeper than this ; he rightly condemns the 
method as fundamentally explaining nothing; wages and 
profits are mere remunerations for productive services; as 
later thought would term them, they are mere distributive 
shares. The various distributive shares do, of course, 
exhaust the value product. But to call them, or any of 
them, costs, and to suppose that thereby the value of the 
costs is explained, is the sheerest of circular reasoning — if, 
indeed, it is not worse: 

If it be true that the wages and profits received by the pro- 
ducer of a commodity are the measure of its cost of production, 
then it follows that all commodities whatever, it matters not under 
what circumstances produced, whether of competition or of monop- 
oly, exchange and cannot but exchange, in proportion to their costs 
of production In truth, the principle that "cost of produc- 
tion determines value" becomes, when thus understood, little more 
than an assertion of an identical proposition, since it merely amounts 

^ This, as is well known, is emphasized by Cairnes with reference 
to international values and international trade, under the principle of 
comparative costs. In this connection, however, the case is put by him 
much more strongly than it will stand : "International values .... are 
admittedly, or at all events are demonstrably .... not governed by 
cost of production, and we have thus- normal values which are not con- 
nected with cost, but come under the influence of some other prin- 
ciple What, for instance, is now the grand argument with the 

people of the United States for the maintenance of protection? Why 
the high cost of production in that country? And what is the evi- 
dence of this high cost of production? Simply the high rates of wages 
which prevail. How, they ask, can we, with our high-priced labor, 
compete with the pauper labor of Europe? I must frankly own that 
accepting the point of view of the current theory of cost, I can find no 
satisfactory reply to this question, and I am quite sure that Mr. Wells, 
who implicitly adopts this point of view, has wholly failed to furnish 
one" (Cairnes, op. cit., chap, iii, sec. 4). Without doubt, the doc- 
trine of comparative labor cost may often, — perhaps commonly and 
adequately, cover this case ; but so does the doctrine of comparative 
entrepreneur cost ; and so, for that matter, would the doctrine of 
displacement or opportunity cost. 



CAIRNES 65 

to saying that values are in proportion to the aggregate of the 
elements of which they are made up.* 

It must, of course, be held in mind that all of this dis^ 
cussion assumes, in conformity with the classical doctrine 
and with Mill's version of it, that rent may be and must be 
excluded from the cost category. But even so, Cairnes's 
attack looks to be more serious than it really is; this is in 
part due to the ambiguous use of the term profit: Cairnes 
is using the term as the equivalent of interest, the reward 
of abstinence. But limited to this meaning, Mill would not 
and could not have assented to the proposition that wages 
and profits exhaust the value product; only when the 
unnecessary profits- as well as the necessary — the quasi-rent 
share as well as the cost share in the remunerations of 
entrepreneurship — are accounted for, can it be said that 
wages and profits exhaust the total value product. In Mill's 
use of terms, cost of production commonly falls considerably 
short of the full value of the product; that is to say, there 
are unnecessary profits ; there are, as later thought would 
put it, non-marginal producers to whom are accruing quasi- 
rents of production. 

But for the purposes of the present issue, the general 
nature of cost, Cairnes correctly interprets Mill's position 
and makes admirably clear the contrasted points of view : 
• Mr. Mill discloses with perfect clearness the line of thought by 
which the view in question has been reached : "What the produc- 
tion of a thing costs to its producer, or its series of producers, is 
the labor expended in producing it. // we consider the producer 
the capitalist who makes the advances, the word labor may he 
replaced by wages: what the produce costs to him is the wages which 
he has had to pay." In other words the point of view is shifted 
from the ground of human interests to the partial and limited 
standpoint of the capitalist employer; and the cost of producing an 
article, which really consists of the sacrifices required of human 
beings for its production, is only considered so far forth as it is 
"cost to him," that much more important portion of the cost which 
is cost to the laborer being put altogether out of view. This point 
of view being once taken, the rest follows simply and naturally. 
What is cost to the capitalist, that is to say, his advances, consist- 
ing of the profits of previous producers as well. as of the wages of 
laborers, profits as well as wages, must evidently be included in 
cost; and not only the profits of previous producers, but .... the 

* Cairnes, op. cit,, chap, iii, sec. 3. 



66 VALUE AND DISTRIBUTION 

profits of the producer of that particular commodity whose cost 
is considered — an extension of the theory which involves this 
curious consequence, that among the elements of the cost of pro- 
ducing a commodity is counted [part of] the profit obtained on that 
commodity by the producer, a profit which I need scarcely say is 

not realized till after the commodity is produced That the 

laborer's share in the industrial sacrifice is by the current doctrine 
excluded from the conception of cost of production does not 
appear to have been seen, or, if seen, to have been adequately 
appreciated by its adherents. Mr. Mill's language seems to imply 
that the wages advanced by the capitalist, .... though he admits 
that they only represent "the cost of producing to him," may yet in 
some way be taken to represent the cost to the laborers also, for, 
having dealt with this portion of the case, he leads on to the 
next with the words : "Thus far of labor or wages, as an tkment of 

cost of production There is also capital, etc." But I must 

absolutely deny that wages can in any way be taken to represent 
the labor element in cost of production. Wages, as Mr. Mill 
observed in the passage already quoted, may be regarded as cost 
to the capitalist who advances them; though it would perhaps be 
more correct to say that, so far as they go, they measure his cost, 
which really consists in the deprivation of immediate enjoyment 
implied in the fact of the advance. But to the laborer wages are 
reward, not cost; nor can it be said that they stand in any constant 
relation to that which really constitutes cost to him." 

Cairnes's affirmative position also is clearly set forth : 

Cost means sacrifice, and can not, without risk of hopelessly 
confusing ideas, be identified with anything that is not sacrifice. It 
represents what man parts with in the barter between him and 
nature, which must be kept eternally distinct from the return made 
by nature on that payment. This is the essential nature of cost: 
and the problem of cost of production as bearing on the theory of 
value is to ascertain how far and in what way the payment thus 
made by man to nature in productive industry determines or other- 
wise influences the exchange value of the products which result.* 

Bearing in mind, then, that labor-pain cost is here set 
up as the determinant of value, it remains logically open to 
Cairnes to take the position that wages and profits are 
results of value and not causes — are distributive shares 
and not costs. This is, in fact, his view; product — in the 
sense of value product — is the source and determinant of all 

"Cairnes, op. cit., chap, iii, sec. 3. ^ Ibid., chap, iii, sec. 4. 



CAIRNES 67 

remunerations. This, of course, leaves it the more neces- 
sary to discover the determining causes of value. Whether 
the fact that value is proportional to labor fully satisfies 
this requirement must for the present be left as an open 
question. At any rate, Cairnes declines to admit that 
wages and profits are in any sense determinants : 

The value of the product resulting from industry forms .... 
the source from which .... industry is remunerated. Nor is this 
conclusion invalidated by the fact that .... the laborer commonly 
receives his reward in the form of wages advanced by the capitalist 
before the product is completed; since what he receives is subse- 
quently recouped to the capitalist, the sum being drawn from the 
value of the product; so that it is still the value of the product from 
which the remuneration of all concerned in the creation of that 
product ultimately comes. Wages and profits in each branch of 
industry are thus derived from the value of the commodities pro- 
ceeding from that branch of industry, and, as ... . wages and 
profits also absorb the whole of that value, it follows that, other 
things being the same, the aggregate of wages and profits received 
by any given group of producers will always vary with the aggre- 
gate of the value of the commodities which they produce.'' 

And then follows this remarkable and important passage: 
Where wages and profits, therefore, in different occupations are 
in proportion to the sacrifices undergone, the value of the com- 
modities proceeding from those occupations will always be in pro- 
portion to the same sacrifices, that is to say, the commodities will 
exchange in proportion to their [labor-pain] costs of production. 

Precisely how much does this mean? Since it is prod- 
uct which fixes compensations, it must follow that to assume 
wages to be in proportion to the sacrifices undergone is 
merely another way of asserting a proportionality of pro- 
duction results to labor burdens ; and so it is, for example, 
true enough that where in two different industries the value 
products are equal, and the pains of production are equal, 
the exchange relations will be those of equal values for 
equal labor pains. This is susceptible of being interpreted 
as a mere mathematical re-expression of the assumptions 
made. But is there more in it? Does the thought go upon 
the Ricardian principle of proportionment of entrepreneur 
cost to labor-pain cost? Have we here any attempt to 
explain entrepreneur costs, or to make use in any way of 

^ Ibid., chap, iii, sec, 5. 



68 VALUE AND DISTRIBUTION 

the entrepreneur mechanism for the purposes of the value 
problem? The thought is difficult of interpretation — per- 
haps impossible of interpretation — in this regard. 

But when and how far will this proportionality between 
the labor burdens invested in commodities and the exchange 
relations of these commodities hold? To the extent that the 
proportionality is found to hold, and only to this extent, and 
for the conditions under which it holds, and only for these 
conditions, does Cairnes stand for the determination of 
value by labor cost. It may, indeed, turn out that this 
labor-cost determinant applies only within very narrow 
limits ; but, at any rate, so far as it may be made to apply, 
something will have been done toward attaining an expla- 
nation of value in terms of this ultimate cost; for in 
-^Cairnes's view there is no justification for talk of any other 
kind of cost than this of labor pain. Pain is presented as 
the condition on which all commodities, or, at all events, all 
freely reproducible commodities, arrive at man's disposal — 
it is their purchase price, their cost in the barter of labor 
for product between man and nature. Mill's fallacy in calling 
the entrepreneur's outlays costs of production lay, Cairnes 
insists, in the patent fact that the entrepreneur is not the 
producer, excepting, of course, to the extent that he is him- 
self a laborer. Not the employer in the shade, Cairnes 
urges, but the wage-earner sweating in the sun is the 
person submitted to the pains of production. True, the 
laborer gets a reward, a wage, more or less adequate ; but 
this reward is not his cost; he is the producer — actually, 
visibly, mechanically, technologically — and his pain is the 
cost through which and on terms of which human society 
obtains possession of its store of consumable goods. And 
it is hopeless to attempt the justification of the entrepre- 
neur notion of cost as, in terms of expenditure, a market 
expression of the underlying and ultimate labor-pain reality. 
Ricardo, it is true, had attempted this, or, more accurately, 
had assumed it out of hand ; but neither to Mill nor to 
Ricardo was it open; the pains are not in any constant 



CAIRNES 69 

or necessary relation to the wages received, else in differ- 
ent occupations and in different countries, and at different 
times in the same country, wages could not vary as they are 
found to vary. 

If wages stood in any constant relation to that which really con- 
stitutes [the laborer's] cost, .... wages in all occupations, in all 
countries, and in all times would be in proportion to the severity of 
the toil which they recompensed.* 

* Ibid., chap, iii, sec. 3. 

Ricardo had assumed without argument, that, as a general proposi- 
tion and in broad averages, wages are paid in proportion to the pain- 
fulness of the employment : thus the entrepreneur outlays and the 
attendant market values become proportional to the pain costs of real 
value. 

In full sympathy with this general point of view, and in the full 
conviction that the only definitive and really explanatory concept of 
cost is the pain-cost concept, Cairnes is yet conscious that wages^ — labor 
cost to the employer — are in many cases far wide of proportionality to 
labor pain. He therefore sets himself to Ricardo's unfinished task, that 
of finding out when and why and with what necessity of supplementa- 
tion, the labor-cost theory may still be regarded as tenable. 

Ricardo had said that the remuneration must be proportionate to 
the disutility — the pain — of labor, else the laborer would change to 
other lines of production, and thereby a readjustment of supplies of 
product and supplies of labor take place so as to bring the situation 
back into nearer approach to the normal. That, at the best, this 
doctrine could go no farther than to assert that the compensation must, 
at the minimum, be proportional to the disutilities, neither Ricardo nor 
Senior had ever perceived : nor by either had allowance been made 
for differences in skill and productiveness relatively to the pains of 
productive effort. 

Cairnes, however, makes this allowance. He sees plainly that the 
rate of remuneration is derivative from the value product, and the 
distinction is clear in his mind between mere weight-and-tale produc- 
tiveness and value productiveness : "Under a system of separation of 
employments, industrial rewards consist for each producer, or, more 
properly, for each group of producers, employed on a given work, in 
the value of the commodities which result from their exertions, I say 

in the value of the commodities not in the commodities themselves 

The value of the product resulting from industry forms thus the source 
from which .... industry is remunerated. The laborer commonly 
receives his reward in the form of wages advanced by the capi- 
talist What he receives is subsequently recouped by the capi- 
talist, the sum being drawn from the value of the. product ; so that it is 
still the value of the product from which the remuneration .... 
comes." — Cairnes, op. cit., chap, iii, sec. 5. 

But all of this being true — and all of it is in point of fact true — •' 
what have costs, in the sense of pain, to do with the case ? How can 
they fee determinant of value or value be proportional to them ? The 
labdr may be the mechanical cause of the product, but with all the 
existifig- differences in skill, and with all the differences in the felt 



70 VALUE AND DISTRIBUTION 

But how far can the principle that values are propor- 
tional to the pains of production be extended? Not far 
certainly, and Cairnes did not claim it to be far : 

Wages and profits will be in proportion to the sacrifices under- 
gone wherever, and only so far as, competition prevails among 
producers — wherever, and so far only as, laborers and capitalists 
have an effective choice in selecting among the various occupations 
presented to them in the industrial field.* 

No perplexity need be caused by the fact that the dis- 
cussion refers here only to the proportion between remun- 
erations and pains, since, as Cairnes has sufiEciently shown, 
and as, in fact, all cost theories assume, values of products 
and remunerations of agents are parallel, and indeed, sub- 
stantially identical facts. But in order that the remunera- 
tions be proportionate to the pains must there not also be 
necessarily implied an equality of productive powers? 
Otherwise it will not be true that "each competitor, aiming 
at the largest reward for his sacrifices, will be drawn toward 
the occupations which happen at the time to be best 
remunerated," ^^ but only to the occupations in which his 
remunerations are his best, which is, by the way, precisely 
the manner and the direction in which each and every man 
in actual society is now drawn. True, the supply of prod- 
burden of labor, how can labor be determinant or measure of value ? — 
that is, be that kind of cost which will express itself in exchange values 
and determine them ? For this Cairnes's answer is that among men of 
the same grade of skill, and under substantially similar conditions — 
and only here — can it be said that painfulness of employment commands 
wages to correspond : so only here are "wages and profits .... in pro- 
portion to the sacrifices undergone," and therefore here only is it true 
that "the value of the commodities proceeding from these occupations 
will also be in proportion to the same sacrifices, that is to say .... 
will exchange in proportion to their costs [pain costs] of production." — 
Cairnes, op. cit. 

But, nevertheless, Cairnes was, in point of view, essentially right ; 
entrepreneur cost is at the best a superficial explanation of value, and, 
as explanation of any sort, is valid only for a competitive, pecuniary, 
exchange economy. Cairnes was groping toward a general value doc- 
trine which should base the supply category upon cost in terms of 
charge or draught upon the life and the life values of the human race ; 
if, over against this life cost, on the supply side, there could be worked 
out, on the demand side, a value-in-use or utility calculus expressive of 
service for the life processes and life purposes of the genus homo, 
value, as the point where human utility-demand forces are equated 
against pain-supply resistances, could fairly present itself as ultimate 
interpretation and explanation of the economic process in society. 

" Ibid., chap, iii, sec. 5. " Ibid., chap, iii, sec. 5. 



CAIRNES 71 

ucts proceeding from "the better paid employments will 
then be increased, and that from the less remunerative 
reduced," but only upon the assumption of equal skill and 
effectiveness in production will this process continue "until 
supply, acting on price, corrects the inequality" : otherwise 
than upon this assumption these inequalities can never be 
corrected so as to make A's reward stand to A's sacrifice 
as B's reward is to B's sacrifice, that is to say, so as to 
bring "remunerations into proportion with the sacrifice 
undergone." 

But it is further to be noted that in order to make this 
pain-proportion doctrine tenable it must not only be assumed 
that all men concerned in it are alike in their productive 
capacity and in their aversion to productive effort, but also 
that they are alike with respect to the forces of temptations 
playing upon them to divert them toward non-productive 
activity; and — what is still more difficult — it must be 
assumed that each man taken separately is always at one 
and the same level of skill, of feeling-attitude toward labor, 
and of feeling-attitude toward the diverting temptations. 
Free and unlimited competition is, therefore — but in a 
much more limited sense than Cairnes had in mind, and 
perhaps hardly even then — "the security for the correspond- 
ence of industrial remunerations with sacrifice, and also, 
and because it is so, the security for the correspondence 
of the value of commodities with their costs of production."^^ 

But how far and under what conditions did Cairnes 
believe his principle of labor cost adapted to function as the 
determinant of values? 

Only under conditions of free and equal competition — 
that is to say, only within certain industrial groupings 
termed by him non-competitive groups — non-competitive in 
the sense, that is, that this free and equal competition is 
not to be found across group lines and between the differ- 
ent groups, but only inside each group and between the dif- 
ferent members of that group: "What we find, in effect, 
is, not a whole population competing indiscriminately for 
all occupations, but a series of industrial layers, within 
each of which the various candidates for employment pos- 
sess a real and effective power of selection, while those 

" Ibid., chap, iii, sec. 5. 



72 VALUE AND DISTRIBUTION 

occupying the several strata are, for all purposes of effective 
competition, practically isolated from each other." And 
inside these different non-competitive groups Cairnes 
believes competition to be an effective fact, with the pro- 
duced values and their remunerations proportionate to the 
pains of production. The foregoing criticism is, therefore, 
not, for the most part, to be understood as bearing upon the 
doctrine of non-competitive groups, but only upon the 
incompleteness and inaccuracy of the description thus far 
given of the nature of the group within which the competi- 
tion proportion holds. Surely, for whatever it is worth, it 
must be admitted that groups of this product-and-sacrifice 
equality sort could be imagined, and, indeed, may be theo- 
retically constructed, in which the doctrine set up by 
Cairnes might find itself illustrated. 

Possibly enough, also, the proportionality of remuneration 
to sacrifice might be established, were sacrifice interpreted 
to include not merely the burdens and pains of pro- 
duction but as well the foregoing of alternative opportuni- 
ties of product or of recreation. This, however, is not 
,/Cairnes's thought, but only that the exchange ratios must 
be conformed to the direct disutilities of production, else 
such a readjustment would take place in the application of 
productive powers as to allow of a larger result in utility 
relatively to the discomforts imposed. And, as we have 
seen, there are cases in which the doctrine would, at first 
sight at least, appear to hold ; and other cases also might be 
admitted, if only still other conditions were accepted as 
limitations ; no serious difficulty would, for example, attach 
to the doctrine when applied to the Crusoe case, if only 
Crusoe's environment were homogeneous in opportunity 
and Crusoe were himself, on all days and during each hour 
of every day, a constant in strength, in zeal, and in need; 
or the doctrine would be adequate for a collectivist society, 
if together with homogeneity of opportunity there were a 
society made up of men each unchanging as an individual, 
and absolutely like all of his fellows in his feeling-attitude 
toward labor and toward the products of labor — or ade- 
quate for a competitive society made up of precisely similar 
human beings, each of whom was self-employed as an inde- 



CAIRNES 73 

pendent producer, in an environment affording no differ- 
entials of advantage from either land or capital. 

And now we inquire as to the basis upon which, in 
Cairnes's view, the non-competitive group is constituted 
and as to the extent to which these groups may be regarded 
as actual facts in modern competitive society. For a 
society of this sort to fulfil Cairnes's requirements, more is 
necessary than that there exist what is commonly regarded 
as freedom of competition; for both capitalists and labor- 
ers not merely the legal right but the practical power must 
exist of effective choice between occupations, without 
obstruction of law, ignorance, or povert}'^, so that the pro- 
ducer may pass freely from the less to the more lucrative 
occupation; otherwise "there can be no security .... 
that remunerations shall be brought into correspondence 

with sacrifice How far does competition in this 

sense prevail in this and other industrial communities?"^^ 
It is admitted by Cairnes that a great measure of immobility 
attaches to both capital and labor — that capital, "once em- 
bodied in a form suited to actual work .... is for the 
most part incapable of being turned to other uses," and 
that "the dififiLCulty of transferring labor .... is even 
greater, since we are here in contact with mental as well as 
physical obstacles." But while all this is true, it is likewise 
true that not all labor need be mobile in order to have 
sufficient mobility for the case ; new laborers are all the while 
maturing. So with capital; enough is mobile to make, in 
conjunction with the streams of new supply, a total of 
mobility sufficiently large to care in a reasonably short time 
for irregularities as they arise. 

And it is further admitted that this new labor is not in 
nature, in intelligence, or in acquired skill, adapted to all 
occupations equally; at the best the choice is within certain 
tolerably well-defined limits; and it is as subject to these 
limitations and restrictions, and by virtue of them, that non- 
competitive groups are constituted; and it is only within 

^ Ibid., chap, iii, sec. 5. 



74 VALUE AND DISTRIBUTION 

these groups that competition is effective and that the prin- 
ciple of cost of production as a pain quantity can be traced 
in the determination of value. This limitation or failure in 
the cost principle does not, however, manifest itself with 
capital, but only with labor. 

"Thus all the products of unskilled labor will," it is said, 
"exchange for each other in proportion to their costs ; as will 
also all the products of ordinary artisan labor as among 
themselves." ^^ This equality may extend from one depart- 
ment of production to another, e. g., from barometers to 
watches, if the lines of exclusion are not applicable. It is 
only within such relations of equality that cost can be a 
proportioner of value. 

Cairnes has now to take account of the fact that many 
commodities are the product of labor belonging to differ- 
ent industrial circles or levels : What then ? 

So far as the two commodities are the products of workers in 
competition with each other, their values will be governed by cost 
of production; but so far as they proceed from workers not in com- 
petition, they must be governed by that other principle" 

yet to be expounded — demand and supply. 

And here again we stop to question, not the group idea, 
for this is perhaps intelligible, but the basis of the grouping 
as it lay in Cairnes's mind. Is it a grouping of laborers 
according to lines of occupation precisely or substantially 
similar? Or is it a grouping cutting across these occupa- 
tion classifications and conforming to levels of ability? And 
what shall be the test of grading for ability, if not the 
wages ? And as to the equality of laborers inside the group 
or the equality in the pain quality of their labor — the group 
homogeneity — one doubts. And in view of the fact that, 

the bulk of the value of each commodity follows one law — say the 
law of cost, or what we shall afterward find to be the law of 
reciprocal demand, while a small remaining portion is governed by 
a different principle," 

the determination of value gets passably indeterminate. 
^^ Cairnes, op. cit. " Ibid. " Ibid. 



CAIRNES 75 

Certainly, as Cairnes explicitly admits, it cannot be that 
we are 

justified in asserting that the commodities in question exchange .... 
in proportion to their costs of production We can only say- 
that they [the values] are so mainly and in their chief ele- 
ments The true conception of a law of costs is thus, not a 

law governing universally the values of any class of commodities, 
but that of one governing the values of certain commodities 
in certain exchanges." 

The pain of labor is treated by Cairnes partly as a" 
matter of duration; but the product must also compensate 
in value for the dangerous quality of the labor required; 
otherwise, one infers, the labor will change to less hazard- 
ous employments. But Cairnes deliberately takes no account 
of skill as value-determining: "Skill is no part of cost; 
and I add that no article is dearer than another simply in 
virtue of the skill bestowed upon it." ^'^ But, of course, 
skill may be the result of labor or of abstinence in its 
acquirement, and in such case it would be an element of 
cost. Cost-wise, the increase in value is not in proportion 
to the skill, but to the cost of acquisition of the skill. And 
thus the group appears to contract yet more and to include 
only those producers who, experiencing equal disutility in 
labor, and reaping equal returns in product, fulfil also 
the condition that their qualities and capacities were obtained 
through a training — or lack of training — of precise equality 
in point of pains and burdens. But, Cairnes says, 

As a matter of fact the products of most kinds of skilled labor 
exchange against those of unskilled in a proportion much more 
favorable to the former than cost of production .... would pre- 
scribe. But .... when the products of skilled labor command 
these high terms of exchange, the conditions of production are not 
those in which cost of production would give value." 

And sometimes, it is remarked, works of high literary 
and scientific excellence get lower compensations than 
lower degrees of skill command. 

But here as elsewhere there is no intimation of the 

"/fcid. "Ibid., chap, iii, sec, 6. ^^ Ibid. 



76 VALUE AND DISTRIBUTION 

manner by which abilities are rated as higher or lower. 
"No more is this elevated value due to the skill which such 
products represent, but to the circumstances which limit the 
possession of the skill to a small number of persons as com- 
pared with the demand for these services." ^^ 

But in a note attention is called to the fact that the dis- 
cussion "relates to skill of different kinds as existing in the 
different departments of industry. Within the limits of the 
same trade or profession, differences of skill will, in gen- 
eral, be accompanied with corresponding differences of 
remuneration." But here again no notice is taken of the 
difficulty of measuring skill otherwise than according to 
the amount of remuneration. And there seems to be entire 
unconsciousness that in admitting this difference of 
remuneration inside the same industry, it must follow, either 
(i) that differences in skill always correspond to differ- 
ences in cost of attainment, or (2) that the group contem- 
plated by the doctrine is an ability-and-pain rather than an 
occupation-and-pain classification. Surely, if the classifi- 
cation is one of ability, remunerations will be the same, if 
ability is measured according to remuneration ; but is it to 
be assumed that the remuneration is proportional to costs 
of attainment? And if the group is constituted by those 
only whose costs correspond at the same time with their 
ability and remunerations, whence shall such a group be 
selected? But in point of fact, Cairnes appears to admit 
that all cases where values remunerate forms of skill not 
acquired through labor burden are cases where the labor- 
pain-cost principle does not apply — that is to say, are cases 
falling under the principle of "monopoly." Seemingly also, 
rent remunerations fall under the monopoly principle, and 
capital remunerations would do so but for the fact that the 
creation of capital is presented as having a homogeneous 
pain cost in the abstinence involved. 

To Cairnes, as we have seen, it seems clear that the 
principle of outlay based upon the market value of the pro- 
ductive agents employed cannot be an ultimate basis and 
explanation of the market value of the commodity product. 
"Employers, we are told, cannot afford to pay any class of 
workers more than their services are worth. Now what is 
the standard of worth here adopted?" It cannot fairly be 

** Cairnes, op. cit. 



CAIRNES 77 

replied that the services are worth what they command, if 
this is offered as an explanation of cost, for this would be 
to explain value by cost and then cost by value, — the old 
difficulty of how to stand firmly with both feet in the air: 

According to this conception of "worth" the statement that wages 
are low because the services they remunerate are of little worth, 
and high because the worth of the services is high, merely means 
that wages are high or low because they are high or low, which 
does not greatly elucidate ^he problem.^" 

Or if the standard of worth is referred to "the actual 
terms of the exchange, it amounts to saying that employers 
cannot afford to pay their workmen more than they actually 
do pay them." It seems clear to Cairnes that the notion of 
"worth as something varying with the utility embodied in 
the services or ... . with the skill which is productive 
of utility," ^^ is, as an explanation of cost or of value, the 
sheerest of circular reasoning ; as, indeed, it is, unless some- 
thing can be done for the case from some other point of 
view. And yet Cairnes applies the same notion to explain 
the different wages "within the limits of the same trade," 
but refers it all to the monopoly principle working through 
demand and supply, and- denies that it is a question of cost 
in any sense. All of which seems to mean that this principle 
of pain cost is a good working principle wherever it will 
apply — which is, as Senior showed, passably rare,-- even 
upon the assumption that the severity and irksomeness of 
labor are not as variable in quantity and quality as are men 
in industry, capacity, and feeling. 

There is, however, one resource for the case still untried, 
and to this Cairnes proceeds to appeal ; it is the principle of 
averages, with especial reference to capital costs. Those 
who deny the actuality of abstinence pain and the necessity 
of its remuneration, if capital is to be had for productive 
purposes, must be supposed 

to regard the act of abstaining from present enjoyment as in itself 
agreeable, and, coupled with the risk which always attends abstinence 

'"Ibid. '^Ibid. "^ See page 50, ante. 



78 VALUE AND DISTRIBUTION 

when practised for industrial purposes, as constituting, in some 
inscrutable way, irrespective of the gains which flow from it, its 
own reward'^ — 

as, we may remark, is sometimes the case, though clearly 
not to an extent to supply the full existing amount of capi- 
tal. And even assuming the saving, it does not follow, 
Cairnes rightly insists, that these savings would be placed 
at the disposal of industry. So self-denial is posited as the 
underlying fact, whereby the furnishing of capital becomes 
a cost in the pain sense of the term. 

But of the fact that "the sacrifice involved in a given 
act of abstinence is very different in the case of different 
persons or at different times for the same persons," Cairnes 
says we are to take no account: "The sacrifices .... 
which govern exchange value are, not those undergone by 
A, B, or C, but the average sacrifices undergone by the 
class of laborers or capitalists to which the producers of 
the commodity belong." ^^ 

But one stops here to object that in this application of the 
group idea we have a sort of group-abstinence jelly, as 
before we found for labor — as qualified by skill — a group- 
labor jelly: 

We may therefore state broadly that differences in the sacri- 
fices incident to production, whether of labor or of abstinence, 
which are due to peculiarities either in the physical, mental, or 
moral circumstances of individuals, are to be excluded from consid- 
eration in estimating cost of production. What we have to do with 
is, not individual sacrifice, but the average sacrifice of each indi- 
vidual class.^° 

But precisely how average sacrifices could assign indi- 
vidual men to this or that line of activity or to this or that 
industrial group, is not discussed; and why the average 
sacrifice should, as a question of cost, have anything to do 
with the individual remuneration is not clear. Nor evi- 
dently would the case be better for Cairnes's purposes if 
the concept of margins were substituted for that of aver- 
ages; the same or greater inequality of ratios between 
padn and remuneration would still obtain. 

*^ Cairnes, op. cit., chap, iii, sec. 6. " Ibid. *" Ibid. 



CAIRNES 79 

But Cairnes's answer to all this would probably be that 
within the group a more detailed and accurate distribution 
takes place; the discussion, at the point in hand, having 
only to do with that cost which bears upon market value, 
and the thought facing not in the direction of distribution 
but of cost. In fact, all the way along in this part of the 
argument, criticism is especially difficult because of diffi- 
culties of interpretation; it is, as we have seen, impossible 
to make out of what sort these groups are — whether con- 
stituted on the basis of the class of commodities produced, 
or of the pains of production, or of the skill applied, or of 
the rate of remuneration received. If distribution inside 
the group is made to depend upon relative pain, it is hard to 
see how the grouping can be either by skill or by product ; 
and yet it is clear that the grouping cannot be by compen- 
sation or by pain. So, precisely of what constitution the 
labor jelly must be in order that the average of sacrifice 
should govern the exchange ratios is — at all events to the 
present writer — incapable of determination. 

And in any case, the detail by which values come to be 
proportional to sacrifices — for after all the doctrine seems 
to be essentially one of proportions — needs elucidation. 
Whether we have labor as direct determinant through pain, 
or as proportioner, or as common denominator measure, is 
past making out with anything approaching certainty. 
Sometimes there is a suggestion of opportunity cost, but 
referring strictly to the laborer or to the abstainer as against 
the employer or the borrower; that is to say, the relative 
attractiveness of different industries is calculated, not 
purely on the basis of burden, but in part upon the basis of 
the remuneration as somehow related to the burden. 

What at bottom maintains the connection between value and 
cost of production is, it must always be remembered, the power of 
choice residing in laborers and capitalists to decide between dif- 
ferent occupations. Now what is it determines the choice? No 
doubt the prospects of the pursuit, the remuneration being com- 
pared with the sacrifice. But what sacrifice? .... Each takes 
account of the incidents of the course proposed, as it bears upon 
himself, and considers how it stands with others equally open to 
him.^" 

But here it must be objected that just so far as the 
question is one of remuneration it is not one of burdens — 



8o VALUE AND DISTRIBUTION 

that is, it is not a question of cost in Cairnes's sense of the 
word, but at best is only for each individual a question of 
the most desirable ratio between burden and remuneration — 
this ratio of pain to compensation differing with each dif- 
erence "in the physical, mental, or moral circumstances of 
individuals." And if, for the case, refuge should again 
be taken in the doctrine of averages, the reply would be a 
fair one that men do not choose occupations or change 
occupations on this average basis. 

At any rate, Cairnes puts it that "carried over into any 
field of industrial competition," individuals are not remun- 
erated in conformity with the sacrifice which each under- 
goes ; but the conformity holds 

among the aggregates of those engaged in the several competing 
occupations ; so that the total remunerations falling to each branch 
of industry shall bear the same proportion to the total 
sacrifices undergone in that branch as the total remunera- 
tion falling to any other in the same field .[industry? grade of 
labor?] bears to the sacrifices in that other.^' 

,/ The total remuneration is, as we have seen, the value of 
the total product; "this value, therefore, will bear the 
same proportion to the sacrifices undergone in producing 
it, as the value proceeding from any other industry within 
the same field of competition bears to the sacrifices of 
which it is the result." ^^ So the sacrifices constituting cost, 
in any field, class, or group, are average sacrifices.^® 

But after all we are inclined to ask ourselves whether 
the clue to all this is not in the fact that a group means 

^ Cairnes, op. cit. ^* Ibid. 

'' "The relation which competition establishes between cost and 
value is one, not between the value of particular commodities and the 
sacrifices of the individual .... but one between commodities taken 

as sorts and their costs of production We cannot, for example, 

assert that a particular pair of shoes will exchange against a par- 
ticular coat in proportion to the sacrifices undergone respectively by 
the shoemaker and the tailor in the actual case ; but we may assert 
that, within a given field of competition, shoes, as one sort of com- 
modity, will exchange against coats in this proportion. The costs, 
therefore, to which the values of particular commodities correspond are 
not the particular sacrifices undergone in producing each commodity, 
but the average sacrifice undergone in producing each sort of com- 
modity .... what we have to do with is, not individual sacrifice, but 
the average sacrifiice of each individual class." — Ibid., chap, iii, sec. 6. 



CAIRNES 8i 

nothing more than those producers with whom there exists 
the same ratio between sacrifices and remunerations. 
Surely, for a group of this sort, values would be propor- 
tionate to sacrifices. 

But finally, it is to be remembered that Cairnes does 
not claim any very wide field for his doctrine: it holds 
simply where it holds, and where it does not hold the law 
of demand and supply — reciprocal demand, as Cairnes terms 
it — is adequate; perhaps also, we may add, for the cases, 
if any, where it does hold.^** 

If, then, this review of Cairnes is adequate,^^ and if this 
attempt at rehabilitation of the labor-cost doctrine of value 
is really the best that can be done, as it is the last important 
and systematic attempt among English economists, an 
impartial judgment will probably declare that the effort 
has served merely to give the doctrine its coup de grace; 
a dogma already in its last gasp has been unkindly done 
to in the house of its friends. 

If, however, any faith should still remain in it for any , 
purpose there is in reserve a seemingly final and crushing 
argument against it, if once there can be established the 
possibility of values and exchanges without anything 

^^ "The law of reciprocal demand fails completely of being a 
principle co-ordinate with, and similar to, that of costs. Instead of 
ruling exchange values in the same way as cost of production, only in 
another field, it turns out that the force of reciprocal demand is 
incapable of determining the value of any single good The pur- 
port of the argument of Cairnes is no more than this : the law of 
reciprocal demand merely requires the general level of international 
exchanges to be such that in the long run the exports of a nation just 
discharge its liabilities, or, in other words, that its exports and imports 
will be led to balance, except for the payment of interest on foreign 
debts, cost of carriage to foreign ship-owners, etc. Cairnes applies the 
law without changing line or point to interchange between non- 
competing groups Cairnes's famous doctrine merely adds 

emphasis to a point already made by Senior, namely, that the wages of 
skilled labor are out of proportion to the amount of labor cost 
remunerated. Though Cairnes rejected the definition of cost as entre- 
preneur's cost, his whole argument signifies that subjective cost, or 
pain-cost, can control market value only by way of controlling the wages 

and interest elements which compose entrepreneur's cost The 

doctrine of non-competing groups signifies that the comparative wages 
cost of different commodities may fail to represent their comparative 
labor costs, or specifically, that they do so fail, when we compare the 
costs of commodities produced by different non-competing groups." — 
Whittaker, op. cit., p. 123. 

^^ I am not, however, sure that it is adequate. I confess to a deal 
of bewilderment. I can only claim to have tried to understand, but 
this without much confidence in my accomplishment. 



82 VALUE AND DISTRIBUTION 

remotely resembling labor-pain cost in the Senior-Cairnes 
interpretation of the term, or in any interpretation yet con- 
sistently formulated. Let us see: 

In view of the fact that each independent producer has 
his evening limit of labor at which more product is at the 
point of indifference as against more effort, and in view of 
the old-time doom that, for society as a whole, it is only 
by the sweat of the brow that bread may be had, there 
might appear to be, for some purposes, force in the labor- 
cost doctrine. And if it is objected that work is oftentimes 
pleasant, that there are countless producers happy in their 
work — a veritable bliss of toil — it is none the less evident 
that as long as the desire for product remains unsaturated, 
as long as more would still be desirable, as long, that is, 
as the product still retains utility to the individual pro- 
ducer, so long work must be sharply distinguished from 
play; so long must work be carried beyond the point to 
which it would go for the mere joy of the working. And 
it may thus be argued that a positive pain cost will still at 
the margin bar the way against any possible pleasure 
economy in the productive process. 

But even so, the theory of labor cost by averages or by 
any scheme of proportion between pains and values, could 
derive small support from this marginal development of 
the labor doctrine, so far as it should purport to serve as a 
method of explaining the terms of exchanges in a com- 
petitive, unhomogeneous, wage-earning society. Some- 
thing, however, might be made out of the doctrine as apply- 
ing to an isolated — a Crusoe — economy, or, by averages, to 
a collectivist economy. 

But it has by different later writers ^^ been made clear 
that cessation of labor is something more than surcease of 
the sorrows of working — that leisure has a positive quality, 
in the recreation that it offers and in the opportunity that it 
presents of enjoyment through the consumption of those 
goods to which labor has created the right. Thus, the 
eight-hour day with its possibly lower wage will reckon, as 
part offset against this possible loss, an added two hours of 
leisure. So the artist may have enjoyed every hour of his 
productive activity, and may leave it, not at the behest of 
health or eyesight, but at the call of some greater alterna- 
tive pleasure awaiting him. The choice, indeed, for many 
workers is — and for all workers conceivably might be — a 

** Notably by Patten, Clark, and MacFarlane. 



CAIRNES 83 

choice between pleasant productive activity, on the one hand, 
and pleasant leisure on the other; and even at the margin, 
therefore — for even the labor-cost doctrine will have to 
adopt the marginal analysis — there is no necessity of pain 
cost. 

That is to say, the positive aspect of leisure, in its 
significance for the cessation of commodity productivity, 
serves merely to lead us to a newly discovered application 
of the principle of opportunity cost. But, in truth, a new 
difficulty here presents itself, though a difficulty with which 
the present argument has no concern : Is not recreation to 
be regarded as, in the personal estimate and reckoning, an 
alternative method of utility production? Is not play pro- 
ductive? And where is the true line of distinction between 
work and play? (See chap, xxvi.) 



CHAPTER VII 
FURTHER COST DOCTRINES 

Labor cost in non-competitive production. Opportunity 
cost. — Attention will later be directed to the fact that, for 
the analysis of exchange value, there is obvious danger 
in the identification of desire with market demand: only 
when purchasing power attends desire can economic demand 
be said to exist. But pushed back into the field of produc- 
tion the difficulty vanishes; here desire and demand are 
one, since the problem is merely what shall be produced; 
the ability to produce attends the desire for product. True, 
the disposition to produce may be wanting; but if so, the 
case is one which for present purposes requires no consid- 
eration. All this is corollary to the fundamental principle 
of economic science, that for questions of production, need 
and desire are fundamental, control supply and direct it. 

Not merely this, but, in the isolated economy, produc- 
tion includes within itself the essential phenomena of 
exchange. Inasmuch as not all the things desired can be 
had in the quantity desired, there must be a choice between 
the things to be had and the things to be postponed or fore- 
gone. Each product costs some other, and the sequence of 
production follows item by item the course of the demand- 
desire curve. 

Interpreted thus — in the sense of sacrificed opportunity 
— the labor-pain cost doctrine of value, as applied to an 
isolated economy, and applied upon the assumption that 
land and other instruments are non-existent or of incon- 
siderable influence, is not very seriously wide of the truth. 
Whatever differences in utility may possibly exist between 
two products attainable by the same quantity of labor, the 
more useful can have a power of displacement — of exchange 
against another — only upon the basis of the equality pre- 
scribed by the similar labor costs. Marginal production, 

84 



FURTHER COST DOCTRINES 85 

in the sense of the point of cessation from work, is reached, 
when, in each line of product, more product will possess 
utility not greater than the disutility attending the further 
production of it, whether the disutility take the form of 
pain, or of pleasure displacement, or of both. And thus, 
while the value determinant may conceivably be found in 
the utility quantum of the marginal product instead of in 
its pain price, it is still true that this marginal quantum can 
equally well be expressed, in point of significance, in either 
of the two ways: (i) as a quantity of utility enjoyed — 
the hither side of the cessation margin, or (2) as a quantity 
of advantage foregone — the further side of the margin, 
since the two quantities are, by the terms of the analysis, 
equal. And so, while the utility of Crusoe's marginal prod- 
uct could not be stated in terms purely of pain — unless, 
indeed, Friday were altogether a tiresome companion, the 
island a savorless island^ and Crusoe himself vacant of 
resources for self -amusement — the utility could always be 
stated in terms of marginal disadvantage, which marginal 
disadvantage would serve equally well with marginal utility 
as the value measure and common denominator of the 
derived value relations. 

But it is important to remark that this equation between 
the importance of the product and the importance of the 
items of resistance — whether of disutility or of foregone 
utility or of both — could convey to no second person any 
information as to the absolute nature or volume or quality 
of the opposing and balancing items, but would speak only 
of the relation between them. The value of the ratio at the 
margin could be asserted as unity, but nothing could be 
implied or inferred as to the importance of the terms in the 
ratio. And evidently with different producers, no basis of 
comparison could be found either for the utility of the 
respective products, or for the burdensomeness of the 
respective efforts, or for the attractiveness of the recrea- 
tions respectively foregone. Abandonment of production 
might, for one person, be consistent with great signifi- 



86 VALUE AND DISTRIBUTION 

cance of product as against great aversion to labor or 
great disposition toward recreation, while with a second 
person, the same hours of work and the same commodity- 
output might obtain, consistently with small pains of labor, 
low appraisal of product, and with little or no interest in 
the alternatives of pleasure. Only the ratio between the 
two opposing quantities can be inferred, which ratio is 
always to be expressed as, at the margin, one of equality, 
whether the opposing quantities are 5 : 5 or 2 : 2 or J^ : J^. 
And, in fact, not even as much as this may seem to 
imply, is legitimately to be inferred. The principle of 
homogeneity, precisely as it is inapplicable to the individ- 
ual's entire day's activity, and is serviceable only as a 
day's-end margin and measure, fails as a method of com- 
parison over intervals of time. That is to say, Crusoe on 
different days is, for the purposes of the present analysis, 
so many different men, with different levels of zeal, vigor, 
capacity for pleasure, and sensitiveness to pain. Nothing 
but the equality of ratios holds. 

Collectivist production would, for the most part, pro- 
ceed parallel-wise with production in the isolated 
individual economy. Production would of necessity accommo- 
date itself to the principle of diminishing item utility with 
increasing product, and of increasing resistance to produc- 
tive effort with lengthening hours of labor; the day's-end 
margin of cessation would be fixed where the group aver- 
age and aggregate of utility from added effort should 
appear to be at balance against the effort pain and recrea- 
tion loss incident to further production. 

But here again, not all the product obtained, and con- 
ceivably none of it, would be at the cost of pain. In a loose 
group way, by an estimate of some sort, a margin of effort 
would be established at which the desire for more product 
should be equated against the resistance to further pro- 
duction; but this resistance would be in part, and might 
be in its entirety, the expression of the pull of recreation 



FURTHER COST DOCTRINES 87 

utility; that is to say, the retirement margin would rarely, if 
ever, be entirely a weariness margin, and might be in no 
measure due to weariness. 

Thus, interpreted broadly enough to include not merely 
labor pain but also — if the case is of the sort so to require 
— all labor sacrifice reckoned in terms of displacement, 
whether of pleasure or of product or of both, — a value 
determinant, or at all events, a value denominator in terms 
of cost may be found, either for the isolated or for the 
collectivist economy, if and when the problem can be taken 
as presented clear of instrument complications ; but equally 
clearly, the denominator may also be stated in terms of the 
utility product against which the cost stands equated as the 
purchase price.^ 

Opportunity cost and outlay cost in competitive produc- 
tion. — In no case can the pains or the pleasures of produc- 
tion have significance for market value otherwise than as 
they bear upon supply — that is, upon the relative volumes 
of goods seeking exchange against one another. All market- 

^ But the labor-cost margin — in no matter what ameliorated sense — 
will not, as the only margin or as the margin of chief significance, apply 
where allowance must be made for the presence of productive instru- 
ments. 

With land instruments and capital instruments, the problem is 
evidently not one of pain, but of displacement. It is even questionable 
whether the weariness margin is — even for the independent producer — 
comparable in degree of significance with the margin of choice between 
industries. Occupations are chosen each as an aggregate and total and 
for long periods, and mostly by comparison of the totals of value 
return. And during all the day, up to the marginal effort, the labor 
product is affording a differential above its pain cost ; but the aggre- 
gate magnitude of these quasi-rent quantities differs with different 
employments, and renders any comparison between industries possible 
only as employment units and totals : the problem, then, even were no 
instrument complications involved, could never present itself in terms 
of pain, but only — if a labor-unit or labor-item question of any sort — 
as a question of how most advantageously to apply the total labor outlay 
in view of the aggregate results. 

Nor even at the margin can the cessation problem with the inde- 
pendent farmer be one solely of weariness against product : if there is 
no question of the hired men, their wages and their acquiesence, there 
are, in any event, to be considered the comfort and welfare of the 
work-animals. 

No issue is intended to be offered here as to the right of pain to 
stand as one among the many different cost considerations to be over- 



88 VALUE AND DISTRIBUTION 

cost doctrines are supply doctrines, and explain value only 
in the sense and to the degree that supply explains value — 
that is, only upon the assumption that demand may, for the 
purposes of the case, be taken for granted. 

Taking as accepted this principle that, under the cost 
problem, we are set to investigate exclusively those influ- 
ences bearing upon supply to limit it, certain typical doc- 
trines of cost, and of the relations of cost to price, await 
examination. 

Let it be assumed that a manufacturer of hats faces the 
following situation : per unit of product he expends $i for 
wages and 50 cents for raw materials ; the capital employed 
in producing a hat would elsewhere earn him 15 cents; as 
employee in someone's else service, he could earn 15 cents 
for each hat now produced; transferring himself and his 
productive equipment to the shoe industry, he could obtain 
a product of $1.85 in place of each hat now produced; he 
sells his hats at $2 each : What is his cost of production 
and what his profit per hat? 

According to the older reasoning and the older termi- 
nology, the 50 cents accruing to the employer, after the 
$1 in wages and the 50 cents in materials were covered, 

born by the remunerations in prospect. Our wheat-producing farmer, 
as we shall later more fully see, presents at the same time many differ- 
ent supply margins ; e. g., a rent-outlay margin, a wage-outlay margin, an 
indefinite number of seed, fertilizer, and implement margins, a corn- 
displacement margin for some portions of his product, a bean-displace- 
ment margin for other portions, capital-wear and land-wear margins 
for some acres of his crop, and, among all the others, pity margins for 
his draft cattle, his wife, and his children, a mixed decency-and-expedi- 
ency margin for his employees, and, finally, a weariness margin for 
himself. And all these margins may be effective at the same time to 
set a limit, in different places and directions, to his production, and 
might conceivably converge in influence to dictate the non-production 
of any particular line of product, or of any particular item of that par- 
ticular line. And at different price levels for products, and with 
different producers, new and different combinations of margins would 
be presented ; different supply volumes have different supply prices. 

And among all these different margins, no one seems to be more 
distinctly supply or price determining than any other, excepting in 
degree of influence ; and in fact no one of them appears, from the 
individual producer's point of view, quite so emphatically price-deter- 
mining as price-determined : but more of this later. 



FURTHER COST DOCTRINES 89 

would be capitalist's profit. But what part, if any, of this 
profit should be reckoned within cost of production? 

Keeping closely in touch with the habit of thought of 
business men, Hadley would, as the present writer under- 
stands him, regard profit as that which remains over and 
above cost of production, and would confine the cost reckon- 
ing to outlays.^ There is room for question as to the 15 
cents for interest: if this were paid for borrowed capital, 
the cost would certainly, in Hadley's view, be $1.65, and 
the profit 35 cents; perhaps it should be inferred that the 
same result would present itself were the capital that of the 
manufacturer himself. 

It appears, also, to have no bearing upon the present 
problem that interest outlays are, in Hadley's thinking, to 
be regarded as mere wages of past labor and to be ranked 
under the general head of wage payments. 

Recurring, however, again to the principle that cost, 
for the purposes of economics, whatever may be the 
preferable view for purposes of bookkeeping, is important 
only as the master-key to the supply problem — that our 
quest is the determination of what the French call the prix 
de revient — it becomes evident that $1.50 or $1.65 bears not 
the slightest relation to cost when conceived as the point 

^ "The excess of return above cost is known as proiit. The profit 
of an individual is the difference between money advanced in produc- 
tion and money received from the sale of the product Profits 

are neither more nor less than the excess of the selling price of the 
products of industry above the money advanced as wages. It is true 
that some of the investments of an individual capitalist are not made 
in the form of wages, but in payments for materials and machinery 
which other capitalists have made ready for use. But if we look at the 
relation between capitalists as a class and laborers as a class, we 
shall find that the capitalists as a body advance wages, and appro- 
priate the difference between the price paid to the laborers and that 
received from the customers." — Arthur Twining Hadley, Economics, 
p. 124. 

This appears to leave the question of interest in about the condi- 
tion that James Mill left it ; but the problem in hand is another prob- 
lem ; were it true, however, that our present concern led us in the 
direction of interest theory, it would be worth while to point out that 
Hadley's definition of interest as commuted profits is open to this same 
line of criticism — that it leaves the time-discount aspect of interest 
inadequately accounted for. — Ibid., p. 270. 



^o VALUE AND DISTRIBUTION 

below which the producer under consideration will decline 
to produce; he could do better than $1.65 as wage-earner 
and better yet in shoe production. 

Mill's view, while confused in terminology and not 
fully consistent in reasoning, approaches more nearly to a 
formulation of the influences affecting the producer's choice 
between his different industrial openings. Profit is dis- 
tributed by Mill into interest, wages of superintendence, 
and compensation for risk. It is true that in one chapter 
Mill speaks of profit as the excess of receipts over cost of 
production,^ while, in another place, he treats minimum 
profit as a part of necessary price,* but as this necessary 
price is the money magnitude for which we are seeking, 
and as, in the general trend of his doctrine. Mill identifies 
cost of production with necessary price, it is in the spirit 
of his doctrine to regard minimum profit as a constituent 
part of cost of production. It is in this sense that we are to 
interpret his statement that the necessary price must be an 
amount sufficient to cover cost and the ordinary expectation 
of profit. Nothing very satisfactory is offered as to the 
quantum of this ordinary profit: In one place a subsist- 
ence-minimum determinant is suggested for capitalists : 
"They will not even go on producing at a profit less than 
they can live upon." ^ But not much is made of this view. 
In general, the doctrine runs : 

The cost of production, together with the ordinary profit, may- 
be called the necessary price or value of all things made by labor 
and capital." .... The latent influence by which the values of 
things are made to conform to cost of production is the variation 
that would otherwise take place in the supply of th"e commodity.'' 

That is to say. Mill divides profit into the two parts, 
one, a minimum or necessary profit, the other, a surplus 

^Principles, Book III, chap, iii, sec. i. 
* Ibid., Book II, chap, xv, sec. 2. 
^ Ibid., Book III, chap, iii, sec. i. 
^ Ibid., Book III, chap, iii, sec. i. 
^ Ibid., Book III, chap, iii, sec. 2. 



FURTHER COST DOCTRINES Qi 

over this necessary minimum. Some part, therefore, of the 
35 cents left over after outlays and interest have been cov- 
ered, is included within the necessary price, the true cost, — 
enough to allow to the entrepreneur the ordinary rate of 
profit. Here, it may be noted, is a distinct foreshadowing 
of the concept of producer's quasi-rent. But Mill makes 
nothing further of it. 

Walker, on the contrary, regards these producers' dif- 
ferentials as of controlling importance in the problem of 
necessary price. Marginal cost of production is taken as 
the determinant of price, and precisely as land rent is con- 
ceived as a surplus over and above cost — a price-determined 
distributive share and not a cost — so producers' differen- 
tials are computed as surpluses above the price-determining 
margin of production and as such are made irrelevant to 
price fixation. For, in order to find the price point with 
manufactured goods, we must, it is said, find the marginal 
producer's cost, just as with agricultural products we are 
supposed to find the cost upon marginal land — a point at 
which there is no differential to be computed.® 

Entrepreneurs are evidently of differing capacities, pre- 
cisely as lands are of different grades of fertility; thus, to 
find the cost-determining production, we must, it is said, 
find the marginal entrepreneur, the lowest paid among all 
those producers who can afford to remain in production. 
Whatever the more skilful entrepreneurs get above this mar- 
gin is unnecessary, or differential, or surplus profit, or pro- 
ducers' quasi-rent, accordingly as one's choice of terms 
may dictate. 

And thus — returning to our hat manufacturer and his 
cost problem — it would seem that, in Walker's view, we 
have not yet sufficient data, either for determining the cost 
in the sense of the profit necessary to keep the manufac- 
ture in the business of production, or for measuring his 
surplus, his differential gain; we must, it seems, first know 

* Walker, Advanced Course, sees, 1 19-143, 297-299. 



92 VALUE AND DISTRIBUTION 

how much his less skilful competitor is making, before we 
can fix upon the lowest price at which he himself will con- 
tinue to produce. 

But according to the principle of opportunity cost, the 
best alternative open to our hat-producer is not to lend out 
his capital and to accept a salaried position ; this would give 
him but 30 cents as his total of interest and personal 
remuneration, whereas in the shoe industry his unit of 
product would have a market value of $1.85, permitting 
35 cents of return to himself and his capital holdings — that 
is, 20 cents for his personal remuneration. In the hat 
industry, however, he is getting $2 of market product; his 
return in the hat industry may fall to the $1.85 limit before 
he will decide to change from hat to shoe production. And 
it is evidently beside the point to urge that his least skilful 
competitor is deriving, from this market price of $2, only — 
say — 10 cents of personal remuneration. This fact, clearly, 
gives no basis for arriving at the first man's occupation 
differential. Nor, more important still, does it necessarily 
imply that the second man is the man upon the margin of 
withdrawal or nearest to it. If, getting in the hat business 
only 10 cents of personal remuneration, his best alternative 
were yet one cent in shoes, he would still be nine price 
points distant from withdrawal, whereas another man of 
very considerably higher absolute profit might be fewer 
points distant. It is, in truth, entirely credible that the 
largest profit-maker in the industry should be the marginal 
producer in that industry. All producers' cost dift"erentials 
are reckoned from this alternative basis, as quantities deriva- 
tive from the opportunity-cost margin. 

Obviously, only the most general notions and the simplest 
of the applications of opportunity cost can be presented at 
this time. One caution, however, appears to be immediately 
called for; the doctrine of opportunity cost, rightly under- 
stood, does not point fundamentally to the question of how 
much could be realized of gain in some alternative occupa- 



FURTHER COST DOCTRINES 93 

tion or activity, but only to how much must be realized in 
the occupation or activity under consideration in order to 
insure its continuance. Opportunity considerations, alter- 
natives, are mere data, among others, in the computation, 
and may or may not be controlling — that is to say, questions 
of taste, of health, of reputabihty, of strain or severity of 
requirement, all may be important factors in the choice. 
Again, the choice may not lie between two gainful occupa- 
tions, but between some one gainful occupation and 
idleness. In short, each man's cost is simply his 
prix de revient, the price requirement upon which the con- 
tinuance of production by him depends. And evidently his 
price may differ for differing volumes of product.^ 

* The relations of opportunity cost to price, as presented by several 
of the later writers, will best be examined in connection with the concept 
of profit — and its relation to cost ; see note at close of the next chapter. 

So far as the present writer is informed, David I. Greene is 
entitled to the credit of first having given adequate formulation to this 
doctrine of opportunity cost — see an article published by him in the 
January (1894) number of the Quarterly Journal of Economics. With- 
out acknowledgment of this contribution, and, indeed, in entire igno- 
rance of it, an article covering very much the same ground was, by the 
present writer, published in the September (1894) number of the 
Journal of Political Economy, under the title of "The Formula of 
Sacrifice;" see also, by the present writer, the May (1902) number of 
the Quarterly Journal of Economics, "Proposed Modifications in Aus- 
trian Theory and Terminology;" and the November (1905) Yale 
Review, "Doctrinal Tendencies — Fetter, Flux, Seager and Carver." 



CHAPTER VIII 

PROFIT DEFINED : PROFIT AND RISK AS RELATED TO 

COST 

Risk profit. — Mill's formulation that necessary price 
must cover, among other things, compensation for risk, is 
incontestable for all cases where risk is really a fact of cost; 
but when, if ever, is this the case? Is it, indeed, clear that 
it is ever the case? And where, then, is the room for risk 
profit ? 

If the risk compensation is only sufficient to cover the 
risk, there is no room for profit. The unharvested crops 
form, in the long run, part of the cost of the harvested. So 
the bad debts of the merchant are a part of the cost of get- 
ting goods into the hands of the paying customer. Here 
is evidently a class of risks that are to be included within 
production costs ; and the compensation, being the correla- 
tive of a risk assumed and not a reward of personal skill 
or effort, is, by this very fact, not a part of profit. It is 
only when the risk remuneration is more than the risk 
burden that profit can be derived from taking risk. 

And in some cases, doubtless, profits of this sort are 
obtained, as with insurance contracts typically, and with 
well-organized businesses in the speculative markets. But 
what shall be said of the risk to which the wholesaler is 
submitted when he buys his supplies, that prices may fall, 
or of his hope that prices will rise? Is the gain, if gain 
befalls, more than compensation for the risk, or is the loss 
other than the equivalent of the gain which was equally in 
prospect when the purchase was made? 

In point of fact, analysis of risk must distinguish two 
cases, (i) where the danger of loss has no correlative of 
gain, and where, therefore, the question is solely as to who 
shall carry the hazard,— cases which easily lend themselves 
to the business of making profit off the carrying of risk; 

94 



Profit defined 95 

(2) where profit and loss are equally in prospect, or are 
somehow in the market equated against each other. 

It is probable that in this second case, utility falling per 
item with increased supplies of goods, the chance of gain 
must, as a computation in terms of dollars, outweigh the 
appraised money equivalent of the chance of loss, else the 
falling utility attaching to each dollar would leave the 
balance slightly one of loss in the individual utility schedule. 

But it is only in cases falling under the first class that 
risk is properly to be reckoned as appreciably an item of 
cost. 

Risk interest. — The relations of risk to interest and of 
risk interest to profit are perhaps not more intricate in 
theory, but are even more disastrously confused in tradi- 
tional economic discussion. Viewed as the reward of absti- 
nence, interest cannot include the risk share in the amount 
received. Viewed as any sort of compensation to the 
owner for investment opportunity foregone, risk must be 
excluded. And as the difference between the present value 
of goods and their future value, interest cannot cover risk; 
only as the difference between a certain present value and a 
contingent future value could the risk charge be included in 
interest. Adopt, however, the standpoint not of the lender 
but of the borrower, and the question takes on another 
aspect. Dishonest borrowing aside, interest becomes a pay- 
ment for the use of wealth, or, more accurately, a payment 
for the difference in desirability, to the borrower under 
consideration, of present over future goods — or, more 
accurately still, of present over future purchasing power as 
reckoned in the prevailing standard. For the marginal 
borrower the interest is the approximate equivalent of this 
difference. 

That is to say, the risk payment is received by the lender 
in one character and is paid by the borrower in another. 
It advantages the marginal lender nothing or nearly noth- 
ing; the risk fact may, in truth, diminish his net or pure 



96 VALUE AND DISTRIBUTION 

interest, by its effect to retire some part of the total demand; 
it burdens the borrower as a cost; it is Hke a tax imposed 
on the loan relation. 

To whom, then, goes the gain to correspond with the 
aggregate of loss to borrowers and lenders? It does not 
necessarily follow that the entire benefit of this intermediate 
quantity — this tax — accrues to defaulting borrowers. 
There is room for lenders' quasi-rents in the relation, — 
that is to say, there may be, in favor of the non-marginal 
lenders, differentials between what it really costs to carry 
the risk and the compensation which the market premium 
upon risk allows.^ And this is the only case of true risk 
profit in the interest relation; subject to this modification, 
the premium is the precise equivalent of the loss danger 
accepted. 

But it remains to ask what name shall be given to this 
equivalent. It is commonly regarded as a portion of profit ; 
but as it is evidently not remuneration for the personal fac- 
tor in production or in business activity of any sort — ^not 
pay, that is, for labor of superintendence or for any other 
form of effort, but only compensation for the danger 
incurred of failing to get compensation — there is force in 
the view that the special category of risk profit should be 
recognized. The objection to this is that, just as when one 
lends his capital he charges something extra for risk, and 
calls it interest or risk interest, so when he puts his own 
capital at risk in his own business, he should, it would seem, 
reckon his risk gain as compensation for the hazardous 
capital use — another form of risk interest. The losses of an 
enterprise must ordinarily be paid out of the operator's 
wealth. Profit-makers pay losses, when losses come, in the 
capacity of wealth-owners and not of mere operators. 

But it has still to be recognized that the thing at hazard 
is not necessarily and solely the capital invested. The 
operator may, indeed, be investing nothing but his time and 
effort; or his hazard may be such as not to extend farther 

^ Cf. Carver, Quarterly Journal of Economics, March, 1891. 



PROFIT DEFINED 97 

than, the value of the time and effort devoted by him to the 
enterprise. 

There is, then, room for a concept of risk wage; and 
for this there could be no valid objection to the term risk 
profit, were the term profit not already overweighted in 
point of duties and overclouded with accumulated ambigui- 
ties. 

The question, then, whether there is any place for the 
term risk profit is to be decided by the meaning intended to 
be attached to the term profit itself; and in regard to the 
precise meaning of this term there exists lamentable uncer- 
tainty. There is, however, a general consensus of opinion 
for the exclusion of interest from the concept; and some 
disposition must be recognized toward the exclusion of 
wages of superintendence; and if the foregoing analysis of 
risk be accepted, there is small justification for continuing 
to include anything commonly indicated under the term risk 
profit; and for whatever need really exists the term risk 
profit and not profit recommends itself. 

Risk interest should be extended to cover not merely 
the hazard compensation of actual lenders but also the 
hazard compensation of him who adventures his own 
resources under his own management.^ 

The question remains whether the term profit shall serve 
(i) merely for exceptional, unclassified, lawless gains — 
conjuncture profits as they have sometimes been called, or 
whether, on the contrary, the term should stand (2) for. the 
broader notion of compensation for the independently work- 
ing human factor in production, or (3) for the still broader 
notion of compensation for the independently gain-acquir- 
ing human factor in economic activity. 

For it must be noted that here as elsewhere there is 
danger of confusing the technological and socially produc- 

^ Cf. Veblen, Theory of Business Enterprise, pp. 120-30, as to the 
difficulty of finding a time unit for the hazards and gains of high 
finance. 



98 VALUE AND DISTRIBUTION 

tive aspects of business with the competitive and gain- 
making aspects. Number (2) would conceive profits as 
compensation for independent productive activity, and 
would thus make no place for a large part of what fall 
under the general head of conjuncture gains, but would 
stand, rather, as an opposed and alternative notion. Num- 
ber (3), the competitive view, would harmonize (i) and 
(2) by including them. 

It has been the writer's preference to use the term 
profit in this third sense, as denoting, that is, the residual 
compensation falling to independent business activity after 
such apportionment as is possible has been made for rent, 
interest, wages, and other outlays. In this sense, profit 
stands as merely one form of the remuneration of labor and 
is thereby a subhead under the broader interpretation of the 
term wages.^ It points to gain without the intervention 
of an employer; it is, then, remuneration to the entrepre- 
neur for entrepreneur activity as such. This profit goes, 
truly, to him who takes the risk, but does not, therefore, go 
as compensation for the risk or in proportion to it.^ 

' For wages, it should be remembered, are not derivative solely 
from technological or other productive activity. I may pay my wage- 
earner to destroy your property or to besmirch your reputation. 

*The concept here presented is believed to be, in a general way, in 
harmony with the later trend of economic thought. Taking the recently 
published works of Professors Carver, Fetter, Flux, Seager, and Seligman, 
as representative in this regard, it will be profitable to glance at their 
respective usages. Thomas Nixon Carver, The Distribution of Wealth, 
Macmillan, 1904; Frank A. Fetter, The Principles of Economics, The 
Century Co., 1904 ; A. W. Flux, Economic Principles, Methuen & Co., 
1904; Henry Rogers Seager, Introduction to Econom.ics, Henry Holt 
& Co., 1904 ; Edwin R. A. Seligman, Principles of Economics, Long- 
mans, Green & Co., 1905. 

Professor Fetter's notion of profits is more easily arrived at than 
that of any one of the other writers under examination : "Profits are 
the net gain of the enterpriser after counting the rent of material 

agents and contract wages Profits are the income attributable 

to the enterpriser's services Economic profits are not contract 

wages, not Tjeing paid by agreement, but being yielded impersonally by 
the industry. Profits are, however, economic wages or the earnings of 

services Profits are due, not to risk, but to superior skill 

in taking risk. They are .... earned in the same sense that the 
wages of skilled labor are earned." — Fetter, The Principles of Eco- 
nomics, chap, xxxi, passim. 

This is not, one infers, a denial that the taking of risk may be the 



PROFIT DEFINED 99 

characteristic and distinguishing mark of entrepreneurship, but it is a 
denial' that compensation for risk is profit, unless in the measure that 
compensation is more than the value and burden of the risk. 

This falls in with Professor Carver's view that the "profits of 
insurance are a kind of risk-taker's rent. They owe their existence 
to the fact that they are not the reward of risk-,taking, but that they 
are a surplus over and above the real risk assumed. [The entrepre- 
neur's risk rent] is due not to the risk he assumes, but to the risks that 

he does not assume Stated more accurately .... his net income 

or profit arises from the fact that he is able to reduce his own risk 
below that which others would h-ave to bear." — Carver, Quarterly 
Journal of Economics, May, 1901. 

Professor Seager defines profits as "balances left over from the 
sale of products after all of the expenses of production have been 
paid," a production-category concept. — Seager, Introduction to Eco- 
nomics, p. 55. 

In a state of normal equilibrium the competition of entrepreneurs 
would bring it about that "the profits of entrepreneurs would just cover 
wages of management." — Ibid., p. 172. 

It is thus evident that in arriving at the profit remainder, Seager 
would conceive of compensation for one's own land and capital as a form 
of expense, "virtually an expense," as he puts it elsewhere ; this leaves 
profit substantially as Fetter conceives it, with some doubt possible as 
to the precise relation in Seager's view between risk and profit, and, 
for Fetter's case, with some ambiguity as to whether profit is a pro- 
duction category or a gain category. 

Professor Flux's notion of profit is more difficult to make plain : 
but it is formulated in better recognition of the latter-day forms of 
business organization. 

Under entrepreneur, that is, under non-corporate management, 
profits are seemingly regarded as in approximate parallel with wages : 

"So long as the business man was in large degree owner and 
manager at the same time, his remuneration naturally covered the 

return to capital and to organizing effort The growing use of 

capital by other than its owners required the separation of the 

remuneration of the capitalist .... from that of the undertaker 

Later we have seen the growth of a great system of joint stock enter- 
prise The replacement of the independent owner of business 

enterprises by a salaried manager seems to suggest a further analysis of 
profit." 

But under the non-corporate form of organization, "the capable 
entrepreneur reaps a reward corresponding to his superiority over the 

less capable man with whom he is in competition If he gets the 

use of capital on better terms, it is because of the lower risk associated 
with his control than with that of the others who pay a higher 

rate The gains of the highly remunerated entrepreneur .... 

are certainly not secured by enforcing harder terms on labor than labor 

secures from rivals Whether the earnings of employers who 

just maintain themselves as employers be regarded as made up wholly 
of wages .... and in no degree of profits ; whether we call the whole 
of the earnings, even of these entrepreneurs, profits, the important 
implication of this view of the case will be substantially the same 

tore 



100 VALUE AND DISTRIBUTION 

[But] the later organization separates the remuneration of the manager 

from that of the owner The distributive share known as profits, 

then, has in practice, had the remuneration of the services of manage- 
ment cut out of it. What is left, profits proper, represents the share 
of those who take risks and assume the responsibility of directing the 
general lines of policy which the manager is to carry out." — Flux, 
Economic Principles, chap, x, passim. 

Fully worked out, however, this more actual treatment would not 
diverge, for theoretical purposes, and for terminology, from the wage- 
view of profit. Doubtless different forms of personal activity are 
included within the function of ordinary entrepreneur managership ; 
some of the these activities are more detailed or more clerical in nature 
than others ; but in any case all are personal activity and are remuner- 
ated as such. That a part are delegated — the less responsible part — 
to salaried employees, leaves the residuum of remuneration none the 
less a remuneration for personal activity, a wage impersonally received 
from the market without the intervention of an employer. The divi- 
dends to stockholders are, then, in part true interest, in part higher 
gains received because of the danger of not getting any gains or of 
losing the principal, in part profit due to differentials between the 
burdensomeness of the risk and its compensation, and in part reward 
for the function of ultimate supervision. It is not to the point for 
present purposes to ask whether, as an ethical or social problem, these 
last are more or less than adequate. 

Professor Carver's concept is more nearly in line with the later 
German terminology ; wages of management are excluded. 

Notwithstanding the fact that in one place he notes that "it would 
be expensive . , . . to grow wheat on land worth $i,ooo an acre for 
market gardening; such land is worth $i,ooo an acre for that purpose 
because of the large profit that can be made in that business ; to grow 
wheat would be a sacrifice of these profits" {ibid., p. 42) — a use of 
profits in the sense of aggregate net return — his more careful formula- 
tion restricts the notion to "only that which is left over after all the 
other shares are paid" {ibid., p. 278). Risk profit, by which is meant 
the excess in the payment for the risk over the actual burden of it, 
and skill in bargaining whereby productive agents are "more fre- 
quently employed at a price slightly under than slightly over their 
marginal productivity, explain the fact that business men as a class 
receive a share in addition to their net wages, rent, and interest" 
{ibid., p. 269) ; that is to say, profits are something over and above 
wages of management. 

But on the whole, if these authors may be taken as representative, 
there appears to be in economic usage some clearing-up of the old 
indefiniteness in the meaning of the term profits, together with a marked 
tendency to regard profit as merely a subhead under the general principle 
of wages — one form of remuneration for the personal factor in 
economic activity. 

Professor Seligman's general notion of profit would appear to be in 
line with this trend : 

The remuneration of the entrepreneur, or the man who carries on the 
enterprise, is called the profit. Among them, wages, interest or rent, 
and profits exhaust the whole income. (Seligman, Principles of Eco- 
nomics, p. 352.) Profits are the income from business enterprise. 



PROFIT DEFINED lOi 

(Ibid., p. 353.) But on p. 427 it is said : "Profits .... are the chief 
inducement to enterprise. The anticipated gains to be derived from 
fluctuations in value constitute the real incentive to business activity, 
and hence to modern production." 

In this last it is implied, not only that profits cover merely such part 
of entrepreneur income as is due to value fluctuations, but also that 
modern productive enterprise would cease to function were these con- 
juncture gains eliminated — if, that is to say, "a state of normal equilib- 
rium" were realized. And with profit so defined, what becomes of that 
part of the entrepreneur's share not due to value fluctuations? For 
we are to remember that "wages, interest or rent, and profits exhaust 
the whole income." This share must seemingly be regarded as falling 
under the head of wages of mianagement. 

What, according to Professor Seligman, ,is to be computed as 
profit in the hat-and-shoe problem (p. 88) ? "The remuneration of the 
entrepreneur, or the man who carries on the enterprise, is called 

profit Wages, rent or interest, and profit exhaust the whole 

income," Under this formulation 35 cents per hat is profit ; but 
under the second formulation — "the gain to be derived from fluctua- 
tions in value" — no answer is yet forthcoming. 

If it may be assumed that the cost investigation is important only 
as bearing on the supply term of the value equation, and that with any 
individual producer the problem of cost is the problem of how much 
pay he must receive in order not to abandon or restrict his production, 
it must be clear that the hat-producer in our assumed case will submit 
to a price of $1.85 before shifting to the shoe industry, and that the 
wage opening of 15 cents has no immediate bearing on the case: $1.85 
is the cost of production; 15 cents is a producer's differential, a "quasi- 
rent of production," or an "unnecessary profit" — or an excess above 
minimum profit, or whatever else it may be preferred to call it. 

But how about the following formulation ? "Profits are always 
a surplus ; they are the difference between the cost of production and 
the selling price" (p. 353). "The excess of price above cost of pro- 
duction constitutes profit" (p. 354). On p. 357, however, it is said that 
"wages are a stipulated income, and profits a residual income" — suggest- 
ing again the 35-cent solution ; but it is immediately added : "Wages 
are part of cost; profits a surplus over cost." And likewise on p. 356 
it is asserted : "Profits are the return from the conduct of business 
enterprise" — a 3S-cent view ; but shortly afterward, upon the same 
page : "Interest is a part of cost ; profit is a surplus above cost" — 
probably, as it now looks, a 15-cent view. But this must finally depend 
upon what cost of production is held to be. 

But evidently a producer must have something for his services ; 
only this something need not be called profit ; still it is, as we have seen, 
sometimes so called. Sometimes, however, the usage falters : 

"The gross earnings would suffice to give him a bare compensation 
for his services, for otherwise he would enter some other employment 
as a wage-earner. [Necessarily as wage-earner? or necessarily, if as 
wage-earner, in some other line of employment?] Gross profits must 
include interest and wages. But there would be no net profit, or 
surplus profit, or profit in the real sense of the word" (p. 354). 

Merely noting, in passing, that the necessary wage i? here made 
part of cost, it becomes evident that this necessary wage is not made 
a part of "net, or surplus profits, or profits in the real sense ;" profits 
are, on the contrary, here presented as that part of personal compensa- 



I02 VALUE AND DISTRIBUTION 

tion above the amount required for the continuance of the business ; 
they are differential profits in the sense of that other terminology that 
holds that "the remuneration of the entrepreneur, or the man who carries 
on the business, is called profit" (p. 352) ; "Profits are the income from 
business enterprise" (p. 353). This net, surplus, or real-proUt concept, 
then, denotes a differential above necessary cost, and gives us 15 cents 
as the solution of our problem ; and this goes logically along with the 
doctrine that, "profits .... are the difference between the cost of pro- 
duction and the selling price (p. 353). The excess of price over cost 
constitutes profit (p. 354). At the bottom of the scale is the marginal 
producer working under the least favorable circumstances, and who 
can nevertheless get no more for his goods. With him price equals cost. 
The excess of price over cost constitutes profits" (p. 354). 

But still another concept of profits presents itself : "Profits are the 
surplus of the intra-marginal over the marginal producer" (p. 353) ; not 
now, be it noted, a surplus above what one must have to keep him in 
the business, but a surplus above what someone else, the marginal pro- 
ducer, must have to keep the marginal producer in the business. This, 
as will be recalled, was Walker's view ; and profit with Walker was 
likewise presented as no part of cost; what you get more than some- 
body else gets is no part of your cost ; it follows that price is deter- 
mined by the cost of the poorest incapable in the trade, it being irrele- 
vant that he may also be so entirely worthless for any other possible 
thing that he would not change occupations at any, no matter how 
great, fall in price ; and the profits unyiecessary to hold in the trade the 
master-minds of the entrepreneur world are whatever they are getting 
more than this rear-guard good-for-naught. 

And in line with this terminology it appears — as it consistently 
ought — that this poor fellow is getting no profits ; which must mean, 
according to the earlier formulation, that he is getting no differential 
above his best alternative — which obviously may or may not be true, 
and is, perhaps, as likely to be true of the most prosperous among his 
competitors. 

Consistently with this concept, no solution is possible for our 
problem ; upon the data given, no single entrepreneur, other than this 
single-footed incapable at the alleged margin, could ever by any possi- 
bility determine his own or anyone's else cost of production. 

Bearing in mind that "net or surplus profit, or profit in the real 
sense," has been defined as surplus over cost — producer's differential 
above necessary remuneration — we approach still another concept of 
profit — a notion something like the German Conjuntur-Pro-fit. Those 
compensations accruing to personal activity and management, over and 
above what must be ascribed to the land and other equipment of the 
entrepreneur, may undoubtedly be divided accordingly as they are or 
are not due to changing conditions — to market fluctuations — tardy com- 
petition — conditions which are, in any society, always in process of 
coming not to be, and which in stationary conditions must in time be 
canceled through the complete working of competition. That is to say, 
there is one portion of the entrepreneur's income which may be said 
to belong to him by a sort of permanent desert and right ; full and 
complete competition would only serve to make this share more secure 
and definite ; while there is another part which befalls irregularly, by 
luck and hazard, and without ethical basis, or claim of any merit other 
than, possibly, of farsightedness, and only through the perversities and 
tangles of things. There are, we repeat, gains of this latter sort, as 



PROFIT DEFINED 103 

truly as there are residuals which the disappearance of these fortuitous 
influences would never reduce or menace. Our author's present concept 
of proiits contemplates these fortuitous quantities : "Profits are a 
result of price, not a cause of price. Products at a lower cost create 
profit ; competition forces prices down to lower cost and eliminates 
profits. Profits can be maintained only by the creation of a continually 

newer cost-level lower than the new price (p. 357) For as soon 

as profit appeared, the entrepreneurs in other fields who were just mak- 
ing expenses would at once bid against each other to secure capital and 
labor, until they would capture their share of the market, and the 
profits would dissipate themselves, on the one hand in the higher rate 
paid for the factors of production, and, on the other hand, in the lower 

price of the product due to the greater supply (p. 354) It may 

conceivably happen, indeed, that all the producers at a particular 
moment are men of precisely the same abilities and subject to the same 

conditions There would be only one identical cost for all units 

of the supply. There could, then, .... not be any permanent profit 
to all the producers, because prices could not permanently remain 
above the mere cost of producing" (p. 245). 

It is evident enough that, on this basis, no precise answer can be 
given to the inquiry as to how much of the entrepreneur's gain is due 
to his own productive activity, and how much to the gifts of fortune, 
through the flux and change of processes and values. Neither our prob- 
lem as stated nor any other problem could present materials from 
which this notion of profit could arrive at a money statement. And 
with this uncertainty as to the competitive share of the remuneration 
there must go also an equal indefiniteness as to the other share — the 
right, due, earned, just, enduring share. Thus this fifth or sixth variety 
of profit appears to promise greater service in ethical — or possibly 
sociological — discussion than in the field of economic analysis. It 
remains, however, certain that something of this rightful and natural 
share there must be — quantitatively and qualitatively vague doubtless, 
but existent. But we find it written : 

"Wages differ from profits in that wages are a stipulated income 

and profits a residual income Wages are a part of cost, profits a 

surplus above cost. The entreprenuer may think that he deserves a 
return for his services, but whether he secures one depends upon his 
competitors. There is always a certain level below which wages cannot 
fall, because no work would otherwise be done ; but the very continuance 
of competitive profit depends upon the abler producer cutting down 
cost to the point where the marginal producer earns no profits (p. 357). 
In society in a state of rest .... the marginal producer would hardly 
make both ends meet, but would earn nothing above his cost" (p. 246). 

This last statement seems to imply that all compensation that does 
not accrue as gift of fortune is cost — that is, is necessary compensation. 
Thus the doctrine which under stable equilibrium would deny to any 
producer anything above his necessary remuneration would amount to 
assigning to him in his best field of activity precisely what — and no 
more than what — he would be worth in his next best field, this ethically 
just ending in the strange perversity of measuring what one can do, 
not by what he does, but by what he would do if he did not do so 
much. 

It is evident enough that we are thus far all the while within the 
field of individualistic entrepreneur cost ; and in this field there is still 
one more cost concept to be presented : 



I04 VALUE AND DISTRIBUTION 

"To the employer cost means total cash outlay expended in produc- 
tion ;" and it is added : "Here the cost is usually less than the price, 
the difference between cost [cash outlay] and price being profit." This, 
however, may possibly not be fairly interpreted as a fifth — or sixth — 
profit concept, since the notion of profit here held would finally resolve 
itself into total remuneration for entrepreneur activity. 

Professor Flux's interpretation of the relations of profit to cost 
is to be deduced from the following : 

"The influence of cost is felt in determining whether it is profitable 
to produce that supply in view of securing the price so determined, 

whether the supply can be, economically speaking, maintained 

The term 'supply price' here used means a price adequate to induce 
producers to prepare, and offer for exchange, a supply corresponding 
to that price. It must therefore be a price suificient to cover cost of 
production, and, if competition be vigorous, the excess over cost of pro- 
duction will not be more than sufficient to afford such profits as com- 
petitors need to secure in order to continue in competition. Some 
writers use the phrase 'necessary profits' to apply to the level to which 
competition tends to reduce profits, and such 'necessary' profits are 
often taken to be included in cost of production" (pp. 52 and 57). 

Stopping merely to note that expenses of production and cost of 
production are here used as interchangeable terms, we deduce from the 
passage cited that the amount to be fixed as the cost requirement is not 
necessarily $1.85 or $1.80, but is a sum "not more than sufficient to 
afford such profits as competitors need in order to continue in pro- 
duction," Profits which would content other producers are the "neces- 
sary profits" for this producer, whether or not — one takes it — he finds 
himself on any other ground able to be contented. 

Fetter holds that, "the value of the product as a whole cannot be 
related to the psychic cost or sacrifices ["pain, fatigue, irksomeness of 
labor"] and therefore it cannot serve as a measure of cost in every- 
day business. Alternative cost is any good or gratification that must be 
given up when any other good is chosen. In this sense each thing is a 
cost of every other thing that might be chosen in the place of it. 
Alternative cost is, therefore, manifold and indefinite. The thought is 
significant at the moment of choice, but is not constantly measurable 
for practical purposes. Money cost is the practical cost generally 

implied in the term cost of production The enterpriser's costs 

determine the lowest price at which he can continue to sell, but if suc- 
cessful, he may have a wider margin of profit" (p. 274). 

Recalling that Fetter's definition of profit is "the income attribu- 
table to the enterpriser's services," and remembering that displacement 
costs must not be regarded, and that only the "money paid out by the 
producer" is "practical cost," $1.50 or $1.65 must be Fetter's solution 
of the problem in hand. And yet $1.65 is clearly not "the lowest price 
at which he can continue to sell ;" it is much lower than the lowest. 

With Seager the distinction between cost of production and expenses 
of production is significant. In cost he reflects the old doctrine of pain 
cost — ^psychic cost, as Fetter has it — ^but with the addition of some 
modern doctrine about displaced leisure and displaced consumption- 
time. "The sum of the efforts and sacrifices that are involved in 



PROFIT DEFINED 105 

production constitute .... the cost of production Effort, .... 

exercise which involves some discomfort or pain .... sacri- 
fices, .... the doing of things that are less pleasurable than other 
things that might have been done but free from any element of pain" 
(P- 53)' Just what use or part this kind of cost has in Seager's system 
of theory is not easy to get at ; but "contrasted with the costs of pro- 
duction which are psychological or subjective, are the expenses of 
production — advances made for materials and other things which 
co-operate in bringing about productive results. The latter are objec- 
tive and may be expressed as sums of money comparable with the 
prices received for products" ,(?• 54)- 

Whether these costs are confined to those technological facts which 
aid in bringing about productive results — a social concept of produc- 
tiveness — or whether "all other things" includes expenses for patents, 
royalties, franchises, privileges, good-will, legislative and municipal 
favors, etc. — that is, whether the production under consideration is 
conceived private-wise and competitively, as matter of individual 
acquisition, need not concern us here. At any rate, "the expenses of 
production include every item of outlay which producers must 
normally and regularly incur to put goods on the market and effect 
their sale, and also such compensation as producers normally and 
regularly require as the condition of their continuing to serve 
industrial society in the capacity of entrepreneurs. These items are 
as follows: (i) Outlay for materials, wear and tear of buildings and 
machinery, etc., which may be included under the expenses of repla- 
cing capital goods used up in production. (2) Premiums paid for the 
insurance of capital goods, (3) Interest for the use of capital. (4) 
Wages to laborers of all grades, (s) Rent of land and natural power 
used in production. (6) Taxes. (7) Minimum profits to the entre- 
preneur to remunerate him for his own time and trouble" (p. 157.) 

What then would be Seager's answer to our hat-cost problem? 
How much- as cost shall be allowed under the head of minimum profits ? 
Seager has a displacement-cost doctrine ; but wage or salary alternatives 
are the only ones admitted to consideration : "The amount that 
should be charged as wages of management or minimum profit is what 
the entrepreneur could obtain for his services if he worked for wages 
or for a salary for a corporation or other employer" (p. 159). One 
dollar and eighty cents is then the answer. But it is nevertheless clear 
that at anything short of $1.85 he will shift to shoe production. 

Now let the problem be modified somewhat ; let the raw materials 
and the wages aggregate $1,50 as before, but assume an interest out- 
payment of 10 cents, the employer using his own capital to the interest 
value of 5 cents. Will this modify the solutions given? Not with 
Seager : expenses are to be understood as including interest items of 
this sort : "The item appears whether, in the particular business, bor- 
rowed capital or capital belonging to the firm is used It is 

virtual outlay," Precisely so : but expenses strikes one as a passably 
poor term to denote the interest on one's own capital ; and it is outlay 
of any sort only in the sense of a displacement fact — an opportunity 
cost. 

It is difficult to be certain of what Fetter would make of this case, 
though it is fair to suppose that, by some sort of recognition of this 
phase of displacement cost, he would somehow arrive at a conclusion 
similar to that of Seager. And for him also the awkwardness would 



io6 VALUE AND DISTRIBUTION 

present itself of making this cost fall within "the sum of money paid 
out by the producer." 

With Flux likewise the solution would probably be the same, 
though it does not clearly appear how, unless upon the ground that 
other and competing producers would not be satisfied were their 
capital not earning a certain specified rate, which rate the shoe manu- 
facturer is thereby justified in computing as within his expenses. 

Carver's definition of profit as what is left over "after the other 
shares are paid," these other shares including wages of superintend- 
ence, obviously excludes profits from the case, but none the less leaves 
it to be asked what relation entrepreneur activity holds to costs and to 
value. 

Accepting one formulation, "The amount of effort which is neces- 
sary to produce a given quantity, say a pound, of one commodity may 
be widely different from that which is necessary to produce the same 

quantity of another When it requires a great deal of effort to 

produce an article, no one will ordinarily be tempted to make that 

effort unless the article has a great deal of value Speaking 

generally, an article must have value enough to persuade men to 
make whatever effort is necessary to its production, or it will not be 

made at all That is to say, its value cannot be permanently 

much above or below its cost of production" (p. 31) — we are far from 
any answer to our problem ; the principle of value is here stated as one 
of pain costs to the employed producer ; the doctrine is not an entre- 
preneur money-cost doctrine in any sense ; the "efforts necessary to its 
production" are not employer facts. For the purposes of the problem 
in hand, this is an impasse. 

But Carver has an opportunity-cost doctrine which promises 
better : "If there are many and excellent opportunities for the employ- 
ment of one's labor and capital, and their earnings consequently 
large, much will be sacrificed in withdrawing them from those other 
possible openings, and only the surplus above this large amount can 

count as the earnings of the land If a certain individual 

with a certain amount of labor and capital at his disposal can earn 
$1,000 a year by working for other people .... a piece of land upon 
which he with his capital could produce a total crop worth only 
$1,000 would be worth nothing to him, but one upon which he could pro- 
duce a crop worth $1,200 would be worth approximately $200 a year" 
(p. 188). 

Like Seager's view, this appears to conceive the displacement cost 
as fixed by the wage or salary opportunity; $1.80 is therefore 
Carver's solution. 



CHAPTER IX 
EARLY UTILITY THEORY: SAY 

Dr. Sewall ^ has made it clear that, in the main, early 
value theory — for what there was of it — was of the labor- 
cost tenor. Mercantilism, for the most part, conceived 
labor as the basis of value, the notion standing, both for 
labor and for product, as one of intrinsic or natural value 
as an objective quality. 

The Physiocrats also were pronouncedly objective in 
their notion of value, identifying wealth with material 
objects, and value intermediately with cost of production, 
truly, — but finally and essentially, with the material land 
product embodied in a commodity, and especially with the 
subsistence material consumed by the artisans. And if it 
be historically the fact that the wage level of French labor 
left no surplus above the subsistence requirement of that 
time, it must be admitted that the doctrine as held did not 
seriously misinterpret the facts with which it had to do; 
wages cost and subsistence cost must, under the conditions 
assumed, be approximately equal. 

But there were in Italy, even as early as the sixteenth 
century, the beginnings of the other line of thought. Da- 
vanzati (1588) recognized clearly the notion of utility as 
subjective fact and as determinative of exchange value. 
"A disgusting thing is a rat; but in the siege of Cesalino 
one of them was sold for 200 florins, on account of the 
great scarcity; and it was not dear, for he who sold it died 
and he who bought it escaped." So Turgot (France, 1775), 
following Galiani (Naples, 1750), explained value, 

^ Hannah Robie Sewall, Ph.D., "The Theory of Value before Adam 
Smith," Publications of American Economic Association, 1901. 

107 



lo8 VALUE AND DISTRIBUTION 

psychologically and subjectively, as the effect of conditions 
acting through feeling. 

But the first systematic exponent of the utility school of 
value was J. B. Say.^ 

Inasmuch as the need of things must lie behind the 
labor production of them, and the need of product lie 
behind the esteem accorded to instruments of production, 
desire being the psychological explanation for the putting- 
forth of effort, it seemed clear to Say that the ultimate 
explanation of value must be found, not in cost, but in 
utility. From the point of view of motive, consumption is 
fundamental to production; thereby the process of valua- 
tion must, in the last analysis, be a question of the relation 
of product to consumption, and not of product to produc- 
tion. 

But note that, accordingly as economic affairs are dif- 
ferently conceived, this may or may not involve the propo- 
sition that demand precedes supply and controls it. In the 
collectivist or in the isolated-individual economy, desire 
and demand, as we have seen, are one. And in a competi- 
tive exchange-value economy, viewing society as a whole, 
and regarding, for the purposes of the case, the existence 
or non-existence of a money intermediate as irrelevant, 
total supply is total demand; demand and supply are merely 
different aspects of the same aggregate of commodities. 
But if, on the other hand, commodities are regarded, not as 
an aggregate but as made up of separate kinds and classes, 
it must be true that only effective demand, demand coupled 
with purchasing power, can control and direct supply; and 
this is especially and obtrusively true under a money 
economy. 

Say, however, saw no occasion to trouble himself with 
these refinements. He accepted the obvious truth that price 
cannot continuously remain beneath cost of production ; 
nevertheless, not the cost but the utility determines what the 
purchaser may be made to pay; if the product is not useful, 
no one will pay anything for it, no matter what the cost : 

* Say, Traite d'economie politique; all references are to the 8th 
edition, Guillaumin et Cie, Paris, 1876. 



EARLY UTILITY THEORY: SAY 109 

Where a receptacle is placed under a fountain, the sides of the 
receptacle do not determine the flow of the water, though they do 
prevent the level of the water from falling below a certain point.' 

Ricardo would, however, have taken no issue here. On 
August 15, 1815, he wrote to Say, 

The utility of things is unquestionably the basis of their value. 
But the degree of their utility cannot be the measure of their value; 
the measure is in the difficulty of production. 

But Say, on his part, is careful not to assert that utility 
measures value, but only that value measures utility.* His 
position seems to be that the utility determines the value, 
causes it, and thus, under the general principle that the 
quantum of cause may be inferred from the m.agnitude of 
its effect, gets measured in it; utility, being purely an indi- 
vidual matter, cannot express or measure market value, 
but, through demand, it determines the market value, which 
market value is thus the sole medium of expression, the 
sole common denominator, in which, whether accurately or 
approximately, the social or general esteem for utility 
receives its statement. 

Thus interpreted, the issue between Say and Ricardo 
may be formulated about as follows : 

Ricardo, admitting the fundamental role of utility and 
not at all denying the directive character of demand, treats 
demand as practically a constant, and explains value varia- 
tions through variations in the relative labor application. 

Say emphasizes variations in demand as fundamental 
and directive, but gives to variations in supply full account 
by way of variations in entrepreneur cost : 

The need of a thing causes the demand; the expenses necessary 
to produce the thing limit the supply. If to the consumer the thing 
is worth its cost, the thing gets purchased.' 

' Say, op. cit.. Book I, chap, i, p. 61. 

* "You accuse me of saying that utility is the measure of value. 
I thought I had always said that the value that men attach to a xning 
is the measure of the utility that they find in it." — Letter to Ricardo, 
December 2, 1815. 

"Say to Ricardo, July 19, 1821. 



liO VALUE AND DISTRIBUTION 

Value, in Ricardo's doctrine, is proportional to labor — 
through entrepreneur cost, it is true — ^but exclusive of land 
and capital disturbances. With Say, value is proportional 
to entrepreneur cost inclusive of rent and interest outlays. 

Ricardo would have labor measure value, labor itself 
the while receiving no measure. With Say, value measures 
utility, value receiving no measure. 

In answer to Ricardo's vigorous denial that the value of 
the labor determines the value of the product, "a view which 
I strive with all my might to refute," and his insistence that 
it is only the comparative quantity of labor that rules the 
relative value of products,® Say objects that there is really 
no distinction, since "you cannot determine the quantity 
of labor except according to the price that you pay for 
it"7 — that is to say, labor, unless it can be shown to possess 
some basis of original and fundamental homogeneity, must 
be rendered into terms of value before a proportion can be 
based upon it; but thereby labor must itself have received 
a measure. Still, it was not fairly open to Say to condemn 
this for its question-begging quality, in view of the fact, 
as we shall later see^ that his own course of argument ran 
as follows: having traced value upon the demand side, to 
utility, he appeals upon the supply side, as does Ricardo, to 
the entrepreneur mechanism and explains the values of the 
products by the values of the costs ; and then, to explain the 
values of the costs, reverts to the value of the products.^ 

'Ricardo to Say, January 15, 1820. 

''Say to Ricardo, November 2, 1820. 

^ It will, perhaps, be well to report the precise words of this 
correspondence, in the terms of the authority from which it is taken ; 
Ricardo's letters, were, however, originally written in English : 

Ricardo to Say, August 15, 1815 : "L'utilite des choses est incon- 
testablement le fondement de leur valeur ; mais le degre de leur utilite ne 
saurait etre la mesure de Icur valeur. Une marchandise d'une pro- 
duction difficile sera toujours plus chere que celle que Ton produit 
aisement, quand meme les hommes conviendraient unanimement quelle 
est plus utile que I'autre. II est bien vrai qu'il faut qu'un produit 
soit utile pour avoir de la valeur ; mais la difUculte de sa production 
est la seule mesure de sa valeur." 

Say to Ricardo, December 2, 1815 : "II faut que je me sois bien 
mal explique, puisque vous m'accusez d'avoir dit que l'utilite etait la 



EARLY UTILITY THEORY: SAY m 

Ricardo in a letter to Malthus, October lo, 1820, says 
of Say: 

He pretends that a commodity is valuable in proportion to its 
utility. This would be true if buyers only regulated the prices of 

commodities But the buyers have the least in the world 

to do with regulating the price; it is all done by the competition of 
the sellers. 

And again, on November 24, 1820: 

I do not dispute the influence of demand on the price of corn or 
on the price of other things, but supply follows close at its heels, 
and soon takes the power of regulating price into its own hands.' 

It is not, however, dear that Say asserts value to be in 
proportion to utility. His position is merely that value 
measures utility; in ultimate analysis, also- — though it is 
not clear that Say recognized it — value cannot be in pro- 
portion to utility, since being a purely personal category, 
utility to one man is not commensurable with utility to 
another man; only through affecting demand can utility be 
relevant to market value. And the case stands the same if 



mesure de la valeur ; tandis que je croyais avoir toujours dit que la 
valeur que les hommes attachent a une chose est la mesure de I'utilite 

qu'ils trouvent en elle Je conviens de meme, avec vous, que la 

valeur d'un produit ne peut pas baisser audessous de ce que coutent les 
difficultes de sa production. Si les hommes estiment que son utilite vaut 
ce prix-la, ils le produisent ; s'ils estiment que son utilite ne vaut 
pas ce prix-la, ils ne le produisent pas." 

Ricardo to Say, January ii, 1820: "Vous me paraissez avoir mal 
comprit une de mes propositions. Je ne dis pas que c'est la valeur du 
travail qui regie la valeur des produits ; c'est une opinion que je 
cherche, de tout mon pouvoir, a detruire. Je dis que c'est la quantite 
comparative du travail necessaire a la production qui regie la valeur 
relative des produits." 

Say to Ricardo, March 2, 1820 : "Je vous avoue que je ne com- 
prends pas trop la difference que vous etablissez entre la valeur du 
travail qui ne determine pas la valeur des produits, et la quantite du 
travail necessaire a leur production qui determine la valeur des 
produits. II me semble que vous ne pouvez determiner la qtiantite et 
la qualite du travail que par le prix que Ton paie pour I'obtenir. C'est 
du moins ce que j'ai toujours entendu par la quantite de ce service 
productif que j'ai appelle service industriel. Son prix fait partie des 
frais de production, et vous-meme etablissez tres-justement que 
I'ensemble des frais de production regie la valeur du produit." — 
CEuvres diverses de J, B. Say, Paris, Guillaumin et Cie, 1848, Vol. IV, 
pp. 409-15, passim. 

• Bonar, Letters of Ricardo to Malthus, p. 1 72. 



112 VALUE AND DISTRIBUTION 

carried out to the marginal analysis ; the marginal buyer 
may consume at a very high rate of utility or at a very low 
rate. At the margin, as elsewhere under the competitive 
system, things go, not according to the highest utility, not 
to those persons to whom the greatest service would accrue, 
but to those whose estimate of utility is highest relatively 
to other things, — to those persons, namely, who will forego 
the largest market-value total; the rich man buys what the 
poor man goes without. 

But Say is nevertheless right in asserting the value 
measure of utility to be a fact, in the sense that by price 
some sort of appraisal of utility is expressed in terms of a 
standard, no matter how wide of strict proportionality to 
utility the price may fall, or how loose and inaccurate a 
measure it may be, and no matter to what m.an, marginal or 
other, it may be a measure — and would perhaps be right in 
asserting that there can be no other rneasure ; and he might, 
perhaps, have also done well to deny — if, indeed, he did 
not deny — that there can be any measure of value, except, 
of course, in some conventional standard, like this of money. 
Has, in truth, value any other statement than by equiva- 
lency in other things of value? Will values reduce to homo- 
geneous utility? Say did not assert that they would; later 
writers, fortunately or otherwise, have so asserted. 

The value of a thing, in Say's view, rests upon the 
fact that the thing has utility; this value indicates that "it 
is esteemed as highly as a certain quantity of another indi- 
cated thing." ^° But this value presents not the owner's 
valuation nor that of any other individual : it is a fact of 
general estimation, a question of what will be paid — seem- 
ingly some sort of vague foreshadowing of the society-as- 
an-organism concept. 

"The price of products is established in each market at 
the limit fixed by the cost of production, provided that the 
utility which is ascribed to the products promotes the desire 
to acquire them." ^^ It remains, then, to seek out the causes 

" Say, Traite d'economie politique, Livre II, chap, i, p. 333, 8th ed. 
Paris: Guillaumin et Cie, 1876. 

^ Ibid., p. 341. 



EARLY UTILITY THEORY: SAY 113 

whicTi determine the prices of the productive agents (fonds 
productifs) . ^^ 

Say's doctrine is that utiHty is primary and cost the 
resistance, which cost is determined by the values borne 
by the productive agents employed. This makes value in 
the agent a cause of value in the product; but directly the 
value of the product will be made the source of value in the 
agent. And it is not made clear what relation the entre- 
preneur's services hold to the result. Do these also give 
value at the same time that they receive it? 

Say admits that if production were merely a matter of 
labor, with all labor at one level of efficiency and of wage, 
those products requiring equal amounts of labor would 
have relative prices to correspond. But land and capital 
come in, and different qualities of men and of land come 
in, and products are the dearer the more and the dearer 
are, in the aggregate, the productive energies employed in 
bringing them to market. "The price will be the sum 
necessary to pay the expenses indispensable to the creation 
of the commodity." ^^ 

Say has small regard for the view that all differences 
in wages are explained by the different costs of rearing and 
of preparation, so that, all the data being considered, all 
wages are equal. And if exception is made of native talent 
and of circumstances of environment, these exceptions, he 
rightly insists, invalidate the rule.^* 

It is interesting to note that Say has, nevertheless, a 
doctrine of real value and of real cost. In general con- 
formity with the reasonings of Smith and Ricardo, real 
value and real cost are worked out as dependent upon the 
pain conditions of production and expressive of them. So 
real value may fall while exchange values are not affected 
— a clear recognition of the fact that only relative costs 
are important for exchange value.^^ 

But to return to Say's explanation for the valuation of 

*^ Ibid. J p. 342. 

Fonds productifs are something more, in Say's thought, than the 

mere objective physical facts : they are valued — funded — and thereby 
capable of functioning as cost data. 

^Ibid., p. 342. ^^Ibid.j p. 343. ^ Ibid., pp. 343-52. 



114 VALUE AND DISTRIBUTION 

cost goods : It is interesting to note that all of this discus- 
sion falls, with him, under the head of distribution. Say, 
like J. S. Mill, takes value and distribution to be parts of 
one problem. And if wages and interest are costs and, as 
such, influence value, this conclusion seems to be inevitable ; 
incomes, while distributive shares to their recipients, are 
costs to those who disburse them as production outlays. 
There is no escape from this unless in denying that dis- 
tributive shares are determined by values. And this seems 
to say that it is only the classical school who can separate 
value and distribution; and in the main they did not, 
though it is true that subsistence cost for wages 
and abstinence cost for interest were each, upon 
occasion, appealed to as determinants of the com- 
pensations fundamental to value. The later school can- 
not logically make the separation — and yet, as we shall see, 
they somehow make it. It is, however, to be said that, other- 
wise than upon this separatist treatment, the position of the 
later school would appear somewhat too obtrusively to 
involve this circuity of explaining costs by value and value 
by costs.^® 

The current value of these productive agents (fonds) .... 
is established according to the same principle as the value of other 

things But the quantity demanded cannot have as motive 

the satisfaction of consumption. A field or a factory does not 
directly procure any satisfaction for its possessor. Their value 
comes, then, from the value of the product which can be derived 
from them, this depending, in turn, upon the use that can be made 
of the product, the satisfaction that can be derived from it." 

" Nor, if scientific explanation or intelligible exposition is the 
end in view, is it a sufficient disposition of the case to declare it 
organic, and thereby to assert or infer that circular reasoning is both 
justifiable and inevitable. This is simply to throw up the hands, to 
abandon the problem. There may, it is true, be nothing else for it, 
but if this is so, let it be so said and an end made of the talking : 
surely by those who assume explanation to be impossible, the offering 
of further explanations is gratuitous. 

In this connection, a note of Say's at the bottom of page 373 will 
be of interest : "I have long doubted whether in the plan of this work 
I should develop what relates to value before what relates to pro- 
duction, that which shows the nature of the produced fact before the 
manner of its production. It has seemed to me that in order to under- 
stand the foundations of value it is necessary to know in what the 
costs of production consist, and, to that end, to form in advance wide 
and accurate notions of the agents of production and of the services 
which may be derived from them." 

" Say, op. cit., p. 367. 



EARLY UTILITY THEORY: SAY 115 

The foregoing would seem to deny the influence of cost 
and to place the determination of value entirely with utility. 
And to assert, as does Say elsewhere, that each cost has its 
value as such in proportion to the value that it produces, 
does not, as has already been noted, appear greatly to help 
the case. 

But later, this doctrine receives a supplement which 
may perhaps sufQce to save it; agents of production do not 
get their value directly from the product, but as agents to 
be combined with entrepreneur activity, and to function 
with it and under the hire of it, in the production of value ; 
their remuneration, therefore, is not precisely the market 
value of their product, even if, as Say believes, this be, with 
accuracy, separately ascertainable, but is merely the market 
value of their co-operation in value production — a quite 
distinguishable thing: 

Whoever controls labor or land or capital is a merchant of that 

commodity which we call a productive service Entrepreneurs 

[note the term] are nothing but intermediaries who, according to the 
demand there is for a product, bid for the productive services 
necessary for the making of it. By comparing the prices with the 
costs necessary to the production of this or that product, entre- 
preneurs decide to produce this or that product, and establish the 
demand for all productive services, and, on the demand side, 
furnish the basis for arriving at the market value of these services. 

The quantity of services offered is the supply basis for 
this value.^^ 

Sympathetically interpreted, nothing quite so modern as 
this is to be found in any of the modern books : no doubt, 
however, this sympathetic interpretation reads into Say's 
doctrine more than he himself saw in it ; his explanation of 
the value of the agent really errs in being over-direct — in 
making the value of the agent to be in theoretically strict 
proportion to the value of the product. Still, he does not 
precisely say this ; according to him, the different distribu- 
tive shares, however received — whether directly from pro- 
duction, or as hire-paid, daily or weekly, or yearly, and 
whether wages or rent or interest — are derived through the 
entrepreneur, "but in whatever manner this revenue is 

^' Op. cit., p. 372. 



Ii6 VALUE AND DISTRIBUTION 

received, it is always in the same right, and its source is 
always a produced value:" in objection to which, or in 
amendment of which in point of possible ambiguity, it is 
to be remarked that when a remuneration is received 
through an entrepreneur, there is no knowing precisely 
what the value product of the agent is ; and were this know- 
able, there is no theoretical warrant for believing that the 
remuneration will equal the product or be proportional 
to it. (See below, chap, xxii.) 

Say's doctrine of rent also reads like some chapter out 
of the latest of modern thought: Whether land be good 
or bad, its annual revenue will be the same ratio to its total 
value, — say the twentieth; this rent may be expressed as a 
per cent, or as a per-acre quantity, and it is in the latter 
sense only that good land may command rent a hundred 
times greater than poor land. "Comparing the value of 
the product with the sale price gives the rent of the land, 
and the rent of good land cannot be higher than the rent 
of poor land" (in this sense of ratio) .^^ 

We must note, however, that this perfect equality of 
ratio between the total value of different lands and the 
term value productivity of these respective lands assumes, 
not merely the distinguishability and separate appraisability 
of the product, but also a perfect homogeneity in the quality 
of the cultivators. Were these all alike in preferences and 

^^ Op. cit., p. 433. 

This paragraph is so important as to call for the author's precise 
words : "En comparant un bon terrain avec ce qu'il coute, on pour- 
rait croire qu'il ne rapporte pas plus qu'un mauvais ; et, en effet un 
arpent dont on retire cent francs et qui coiite d'achat trois mille 
francs, ne rapport pas plus qu'un arpent dont on retire seulement dix 
francs et qui ne coute que trois cent francs. Dans I'un et I'autre cas, 
la terre rend a son proprietaire, chaque annee, le trentieme de sa 
valeur. Mais qui ne voit que c'est le produit annuel qui a eleve la 
valeur du f onds ? La valeur du produit compare avec le prix d'achat 
fait la rente de la terre, et la rente d'une bonne terre peut n'etre pas 
superieure a la rente d'une terre mediocre ; tandis que le profit 
fonder est la valeur du produit annuel compare avec I'etendue du ter- 
rain ; et c'est sous ce rapport que le profit que rend un arpet de bon 
terrain peut etre cent fois superieur a celui d'un mauvais." 

This, it will be noted, is the view in support of which Professor 
Fetter has marshaled all the resources of wide historical research and 
of keen theoretical analysis. It may now be hoped that this truth, 
having so long awaited its second statement, may, in its later and more 
scholarly presentation, have the good fortune not to be again forgotten. 



EARLY UTILITY THEORY: SAY n? 

aptitudes and in cleverness of bargaining, or were all land 
alike in point of adaptation to varying methods, e. g., to 
intensive and extensive methods of cultivation, and alike 
also in adaptation to the varying preferences, tastes, aspira- 
tions, and skill of the cultivators, the proportion would, 
truly, be a constant between the market value of the agent 
and its value productivity. With facts as they are, this pro- 
portion can be asserted only between the market value of the 
land and the market value of its value productivity; 
this last proportion, however, means nothing for the 
present purpose, since the market value of the rent-bearer is 
nothing but the capitalization of the prospective rentals 
according to the current market rate for such invest- 
ments. 

Savings and capital applied to the land become part of it; ... . 
they lose the nature of capital and become land funds.°° 

One part of the national capital is diminished to the 
corresponding increase of another part. It is thus evident 
that Say cannot possibly concur in Ricardo's notion of the 
relation of rent to cost and to value. Ricardo arrived at his 
labor -proportion doctrine of value, first, by reducing capital 
to labor and, second, by excluding rent from the computation 
— that is, by placing value fixation at the land margin. 
It is probable that this service to the labor-cost doctrine was 
all or nearly all that, in Ricardo's mind, these tributary 
doctrines were ever good for. Recalling, however, that the 
labor-proportion theory was worked out by him through 
the entrepreneur mechanism, the notion becomes untenable 
that as a problem in entrepreneur cost the expense of pro- 
duction is greater upon marginal land than upon other 
land, or that as a question of entrepreneurship — of the 
personal margin as against the instrument or agent margin 
— the marginal cultivator is more likely to be upon mar- 
ginal than upon other land. The question is, therefore, 
ultimately — and we have finally arrived at it — whether in 
the cost investigation we are concerned with social labor- 
purchase cost as against competitive entrepreneur cost, or 
with agent and instrument margins as against that marginal 
entrepreneur in whose processes of choice all agents and 
instruments, marginal or other, are mere data. And finally 
— but as less difficult — there is the problem whether, upon 
a value basis, marginal land or marginal capital or marginal 

'"Op. cit., p. 435. 



Ii8 VALUE AND DISTRIBUTION 

labor can mean anything more than valueless land, valueless 
capital, or valueless labor — the equivalents of free land, 
free capital, and free labor — economically, that is to say, 
no land, no capital, no labor. 

At any rate, it is clear that the argument that the rent 
of better land does not enter into cost of production, since, 
for whatever more is advanced as rent, there is a corre- 
sponding increase of product, would equally well apply to 
exclude wages or interest from cost. 

As we have seen, there is never, in the crucible of entre- 
preneurship, any accurate correspondence between the out- 
lays of different entrepreneurs and the addition to product; 
in truth, the varying proportions in which different entre- 
preneurs employ the different productive agents should 
suffice as proof of this ; but for the purposes in hand this 
need not be insisted upon. Rent as a differential of price 
paid for a differential of service is, as cost, not distinguish- 
able from wages or interest. 

Ricardo .... shows that the rent is not the cause but the 
efifect of the need felt for wheat; and the reasons which he adduces 
will serve to prove against him that the other expenses of pro- 
duction, notably the wages of labor, are likewise not the cause but 
the effect of the current price of the product.^ 

And in summary Say remarks : 

The ideas of David Ricardo have been of service to me in cor- 
recting several parts of this treatise, principally in what has rela- 
tion to money; but he has supplied me with no single improvement 
to introduce in that which relates to rents (profits fonciers).^ 

Verily Say was a modern of the moderns. 

^ Say, op. cit., p. 438, note. 

^Ibid., p. 438. 

Malthus : Despite marked shrewdness of observation and great 
originality of insight, Malthus' muddle-headed quality in theoretical 
thinking leaves not much to be had from him for value doctrine. 
Bearing in mind that the purpose of the work in hand is constructive 
rather than primarily historical or critical, and therefore does not con- 
cern itself with tracing the growth of theory, or with outlining the 
systems of thought of different writers, excepting to the extent that — 
as a method of presentation and mostly irrespective of the personal or 
systematic interest, as such — these different positions may, illustratively 
or by statement and criticism, be made to serve the purposes of expo- 
sition, we shall decide that the views of Malthus need not long 
detain us. 

As has been already noted, he was by full and frank profession, 
a disciple of the labor theory of value — ^but all the while with some 



EARLY UTILITY THEORY: SAY 119 

misgivings and with some reservations. For even though, causally 
speaking, labor was admittedly the determinant of value, yet, as a 
question of exchange power, of relations between commodities, and 
as a problem of the choice of a value measure, it appeared to him much 
more relevant to ask how much a commodity will command of labor 
wherewith to produce more commodities, than to inquire into the quantity 
of labor invested some time in the past in its production. And so 
Malthus stood for the labor measure of value, but this in terms of 
labor purchasable instead of labor expended, and with the emphasis 
upon service in terms of labor spared to the purchaser or of the 
service offered through the purchased goods. 

In Malthus' controversy with James Mill as to the possibility of 
a general glut, this same issue is in the background and takes a position 
of controlling importance. In that controversy Malthus restates the 
issue as substantially whether commodities in general may be selling 
at less than their costs of production. His argument {Definitions in 
Political Economy, London, Johni Murray, 1827, pp. 44 ff.) pro- 
ceeds upon distinctly entrepreneur cost lines, regards rent payments 
as, for purposes of cost, precisely like other outlays, and finds the prac- 
tical test, for that practical man who is trying to decide whether the 
market is overdone, to be in the equality of money intake with money 
outgo : "The hop planter who takes a hundred bags of hops to Wig- 
hill fair, thinks little more about the supply of hats and shoes than 
he does about the spots on the sun. What does he think about, then? 
And what does he want to exchange his hops for ? Mr. Mill seems to be 
of opinion that it would show great ignorance of political economy to 
say that what he wants is money ; yet .... it really is money 
which he wants and .... this money he must obtain, in the present 
state of society, in exchange for the great mass of what he has brought 
to market, or he will be unable to carry on his business as a hop- 
planter ; .... he must pay the rent of his hop ground in money 

[this being presumbaly so fixed by agreement] He must pay 

for his poles, his bags, his implements, etc., in money He 

must pay the .... laborers which he employs upon his grounds, 
during the course of the next year, in money, and .... it is in 
money alone of all the articles brought to the fair, that he can calcu- 
late his profits True, .... the landlords and laborers 

who are paid in money will finally exchange it for something else, as 
no one enjoys money in kind except the miser: but the landlord .... 
would be little likely to accept from the hop-planter the articles which 

he could get at the fair in exchange for his hops And as 

matter of fact, the laborer .... is paid in money. Foreign trade is 
no doubt mainly a trade of barter. But the question whether British 
woolens find an adequate market in the United States does not depend 
upon their purchasing the same quantity of tobacco as usual, but upon 
whether the tobacco, or whatever the return may be, will purchase the 
British money or the British labor necessary to enable the woolen 
manufacturer to carry on his business successfully. If both woolen 
manufacturers and tobacco are below the cost of production in money 

or labor, both parties may be carrying on a losing trade 

This is the answer to the pamphlet which Mr. M. Say addressed to me 

several years ago The power of replacing capital will mainly 

depend on the power of commanding labor Commodities in 

general, and corn most particularly, are continually rising or falling in 
money price .... while the money price of labor remains much 



I20 VALUE AND DISTRIBUTION 

more nearly the same What are the costs of production? 

They are either the amount of money necessary to pay the labor 

worked up in the commodity, and in the tools, etc with the 

ordinary profit, etc or they are the quantity of labor in kind, 

etc Now surely, it cannot be denied theoretically, that all 

commodities produced in this country may fall in comparison with a 
commodity produced in Mexico. As little can it be denied, theo- 
retically, that all commodities produced by British labor may fall as 
compared with that labor." 

From another point of view, and for other purposes, Malthus' 
doctrine of a general glut will later occupy us further. For the 
present, the sole concern is to make clear the distinction, as it lay in 
Malthus' mind, between labor as the cause of value and labor as the 
measure of value — and particularly to make it clear that this labor- 
purchase notion, this forward- rather than backward-looking view, is a 
groping effort toward utility rather than cost as the basis of value. 
The value of the goods is taken to rest rather upon the service to be 
obtained from the goods than upon the labor expended in their 
production. 



CHAPTER X 

THE CAPITAL CONCEPT 

Precisely why the distrihuendum in society should be 
taken to be the produce annually to be divided, as against a 
weekly or monthly or decennial division, is not clear ; but it 
is clear that unless the distributive process is conceived as 
carried on concurrently with the productive process, there is 
no reason why the annual term is not as serviceable as any 
other. / 

We are not yet ready for a full consideration of the 
notion and nature of the social dividend;^ broadly, how- 
ever, it may be taken to indicate the aggregate social output 
of consumption goods — commodities, benefits, enjoyments — 
all things, in short, accruing to men as economic income, in 
any given unit of time. It is, indeed, sufficiently difficult to 
make precise the content and limitations of this social-divi- 
dend concept and of the distributive-income concept; and it 
may be inexpedient to attempt here even to place the inter- 
rogation points. If the textile worker makes you a suiting, 
and the tailor makes this into a suit, no one would question 
that both the making of the cloth and the making-up of it 
into a suit are services — items contributing to your real 
income. But how if you make your own cloth? or mend 
your own coat? These also are facts of income, results 
enjoyed, but are they thereby the subject-matter of the dis- 
tributive process ? Are they parts of the social dividend for 
any purposes of theoretical analysis or of the practical 
applications of doctrine? Are you a producer when you 
cook your own food ? The restaurant-keeper and the board- 
ing-house mistress render utilities of a highly important 
order; their activities are productive, and the products 
thereof are parts of the great distrihuendum. So the house 
servant and the house cook are likewise productive 

^ See chap. xxvi. 



122 VALUE AND DISTRIBUTION 

of distributed utilities — goods of attention, conven- 
ience, comfort, or show, as well as of cleanliness, 
palatability, and digestibility. It is, then, inadmissible 
to deny productivity to the housewife equally with 
the bread-winner; house-bound women are something 
more than supervisors and directors of the consumption 
process; they are producers. But, even so, does this avail 
to include their products within the goods which get dis- 
tributed? Or is there a line of distinction between pro- 
duced goods and distributed goods, accordingly as these 
goods do or do not go through the crucible of market valua- 
tion? And if this be the dividing line, must not the home- 
grown and home-consumed eggs and chickens and pork of 
the farmer be set outside the distributive problem merely 
because they never reach the market? 

And this is not the only difficulty, nor is it, for theo- 
retical purposes, the most perplexing difficulty. A goodly 
part of each man's purchasing power is expended in the 
direction of services, in the more limited sense of goods 
not fixed and embodied in matter.^ One pays to be cured 

^ No one will today deny the productivity of the preacher or 
singer or actor ; nor is today the distinction between material and 
immaterial of great significance anywhere for economic science — 
quite irrespective of the long-standing but lately much-litigated prob- 
lem as to the philosophical justification for any such distinction. It is 
well, however, to appreciate the aspect in which the question appealed 
to the earlier economists. 

Mercantilist thought had, it is true, abandoned the cameralistic 
point of view, according to which all economic inquiry regarded solely 
the prince's welfare in the administration of his private estate — the 
ends proposed being simply the maximum possible revenue and the 
highest level of dynastic prosperity. 

But Mercantilism was none the less consistently national in its 
point of view, as distinguished from individualistic and personal ; and 
it was competitively national as distinguished from social or cosmo- 
politan. How, indeed, shall any people grow in economic power as 
against its neighboring enemies ? by piling up wealth, by goodly accu- 
mulations of munitions and moneys and credits against the time of con- 
flict. And how shall any man or nation become wealthy, except by sell- 
ing more than is bought in, by keeping consumption under production? 
And how so well extend your personal economic dominion over your 
neighbor and over your neighbor's possessions — his desirable daughter 
included — as by getting him into debt to you ? Or how so well render 
yourself strong, and at the same time your competitor nation weak, as by 
getting it into debt to you, or better yet, by getting its purchasing 



THE CAPITAL CONCEPT 123 

of his ills, or of his ennui, to be passively exercised by the 
masseur, to be solaced by the ministrations of the pianist, 
the vocalist, and the elocutionist. Instead of our looking at 
pictures, the orator or the actor paints pictures in our 
minds. But suppose one plays the violin, not for another's, 
but for his own enjoyment, and without monetary recom- 
pense ; or provides his own exercise, paints revery-wise his 
own dream pictures, cures his own ills, basks in the sun to 
his own great warmth and enjoyment, and, in general, has 
a good time; once again, is all of this production? Or, if 
not, is the basis of the distinction that these activities or 
passivities fail of getting valued in the market? Or is it 
rather that they are entirely internal ? Or is it that they are 
free goods to be had without any sort of sacrifice, by play 
rather than by work? In truth, we are again in face of the 
difficulty of defining play. Is the essential characteristic of 
it in its non-productivity, or rather in its non-sacrifice char- 
acter, the free-goods quality of its product? In fine, what, 
accurately, do we mean by production? 

Putting aside for the time being these more or less 

power into your own control, through cornering its medium 
of exchange? And how accomplish all or any of these things 
unless by selling your victim neighbor or nation more than 
you buy back? Thus conceived, with the nationalistic emphasis, 
the whole question becomes not primarily one of income, 
or of aggregate satisfactions and total consumption, but of accumula- 
tion, and especially of growth in wealth under the form of foreign 
credits or other ready international purchasing power. 

Proceeding from substantially the same point of view, the physio- 
cratic school seemed to itself to have discovered a method better 
yet — accumulation truly, but accumulation rather of population than of 
wealth. Artisans consumed as much wealth as they produced ; the 
social cost of their product was as great as their product. Manu- 
facturers were regarded as, in Dr. Franklin's phrase, "subsistence meta- 
morphosed." Agricultural laborers also consumed all that they 
produced or, at all events, all that they received in wages, and seemingly 
must always command so small a wage as to make this a permanent 
fact ; whatever the product of labor and land together might be, the 
excess in produce over the laborers' wage and necessary subsistence 
must go to the landowner as the equivalent and expression of the pro- 
ductiveness of the land. So with agricultural, also, as with artisan 
labor, the social cost canceled the social product ; only the land was 
productive of net product. But even so, there was this difference 
between artisan labor and agricultural labor, that artisan labor did not 
increase the total population maintainable in the country, gave forth no 



124 VALUE AND DISTRIBUTION 

gratuitous difficulties, it may be said that economic com- 
modities — products for economic purposes — are restricted 
to those desirable things which are not free. But especially 
is it to our present purposes to note that this is not quite the 
same thing as a restriction to those facts produced by labor 
or attainable only through labor. For there is much value 
no part of which, or but a small part of which, is labor-pro- 
duced; and some of it is not labor-wise obtainable. The 
productivity of what is broadly called land manifests itself 
in part in values of this sort based upon qualities of origi- 
nal fertility, or upon non-produced facts like scenery, loca- 
tion, springs, mines, water-powers. It is the fact of limited 
supply of products and of their value standing derivative 
from this limitation, rather than of mere labor origin or 
labor limitation, that gives any agent or instrument its 
right to claim productivity for itself; environment is as 
truly productive as is organism. 

Utility and the necessity of sacrifice for its enjoyment 
appear, then, to be the only requisites of value. All valuable 

subsistence product, no life material, while the product of agriculture 
may be regarded as population, expressed in the form of its raw 
material. And it seemed clear that national supremacy was rather a 
question of population than of accrued wealth. 

It follows also that, inasmuch as the laborer received only 
enough to live upon anyway, there was small use, and some harm, in 
trying to tax him ; the only man who, having a product net, a surplus, 
could pay, was the landlord, the rent-gatherer ; if the laborers paid 
taxes, it must be at the expense of their number. It followed from 
all this, then, that the program fundamental to national greatness was 
to foster agriculture as a life-maintainer, the sole source of increasing 
population, and to tax the land. 

Adam Smith, coming into the national point of view as an inherit- 
ance from earlier thought, set himself deliberately to the investigation 
of the causes, and to the formulation of the rules, making for the 
increase of the opulence of nations, and found that while manu- 
factures were productive, they were not so in the same sense as agri- 
culture, while labor as mere service was not productive at all. The 
shadow of physiocratic reasoning was still over Adam Smith. 

Not having arrived fully and consistently at the individual point 
of view in economic analysis, John Stuart Mill followed substantially in 
the footsteps of Adam Smith : Unproductive consumption is con- 
sumption that does not furnish maintenance for productive labor ; 
productive labor is, in turn, that labor which affords an addition to the 
aggregate accumulated wealth possessions of society ; thereby he arrived 
at the distinction between material and immaterial. But this distinction 



THE CAPITAL CONCEPT 125 

consumption goods are products either of labor or of 
environment; and the problem of distribution has ulti- 
mately to do only with consumption goods. 

If all consumption goods are products, it remains to ask 
of what they are the products; and how many are the 
factors of production, through which contribution is made 
to the supply of things, facts, and conditions possessing 
value ? 

It is to be kept carefully in mind that even though the 
question is stated as one of the factors making for value 
product, this search for factors is none the less a search 
for the objectively existing facts, means, intermediaries, 
and instruments, conditioning the existence of the value 
product, and standing, with reference to the product-result, 
in a physical-causal relation as the first term in the force- 
cause sequence. That is to say, the point of view and 
method of approach are, in the more inclusive sense of the 
terms, mechanical and technological in significance. Surely 
in a sense, hut in a quite different sense, monopolies, patents, 
good-will, trade-marks, etc., are productive; incomes go 

between material and immaterial rested not at all upon considerations 
of utility, of importance for consumption, in the aspect of service to 
human needs, nor finally and fundamentally upon some test of con- 
crete reality, or of tangibility, or of materiality in any philosophical 
sense, but solely upon the aspect of permanency. For in a general 
way, that which is material and tangible is enduring ; at any rate, that 
which is not material, which has no substantiality, is evanescent ; in 
coming to be it ceases to be. Thus only material things can add to 
national wealth. And that some forms of material wealth are them- 
selves very temporary in their existence, e. g., ice cream, leaves the 
line between the material and the immaterial none the less an actual 
line and, at the same time, a line which coincides practically with the 
line between the things that add to national accumulated riches and the 
things that do not. 

All of which was excellent for its purpose, and need have occa- 
sioned no perplexity or controversy, if only Mill had not fallen into 
the error of following his predecessors in their bad choice of terms ; 
for the line which he was really seeking was not that between the pro- 
ductive and the non-productive, or between the material and the imma- 
terial, or between the tangible and the intangible, but merely the line 
between the accumulatable and the non-accumulatable. Interpreting his 
terms productive and non-productive in this sense, no difficulty is pre- 
sented, excepting, perhaps, with regard to the significance of the dis- 
tinction, as seen from the point of view of a more modern analysis and 
of its theoretical needs. 



126 VALUE AND DISTRIBUTION 

with them, they are capitaHzed into market values, and are 
sold in the investment markets ; that is, they are acquisitively 
productive for the purposes of private interests and of indi- 
vidual ownership; they are, in fact, differential opportuni- 
ties reduced to private property, and enjoyed, as is the 
essential fact of private property, under the right of exclu- 
sion of all other claimants. These property rights, many of 
them purely distributive in ultimate bearing, are neverthe- 
less not readily distinguishable, excepting upon technologi- 
cal grounds, from ownership in lands or other rentable and 
productive instrumental goods. 

But conceiving of the productive process technologically, 
what different productive categories demand recognition? 

The fundamental distinction would seem to be that 
between man, as agent-laborer and producer, as over against 
the aids, auxiliaries, and instruments employed by him. This 
parallels the distinction between organism and environ- 
ment, and corresponds accurately with the nature of income 
as received (i) by virtue of personal activities, and (2) as 
derivative from possessions. 

Accepting, for the time being without question, this 
first category, that of the human actor manifesting himself 
in economic production under the aspect of human labor, 
we turn to inquire whether the aggregate of productive 
possessions is to be further distributed into the prevailing 
land and capital categories, and, if so, whether the distinc- 
tion between land and capital is to be rested solely upon 
their different relations to the technology of industrial pro- 
cesses, or is to be justified under some further and different 
principle. 

Waiving for the present the question whether, as factors 
of production, any distinction other than technological is 
admissible, we confine our inquiry to the validity of the dis- 
tinction as based solely upon technological considerations. 
For technological purposes, then, is land weath to be dis- 
tinguished from other weath? 



THE CAPITAL CONCEPT 127 

The extractive industries — the industries of raw ma- 
terial, the industries primary and basic in human hfe — 
depend upon the land, land in this sense being, of course, 
taken to include seas and rivers and mines. This distinction 
between extractive, or primary, and industrial, or secondary, 
coincides for the most part with the distinction between 
agriculture and manufactures, and is doubtless of very con- 
siderable significance for certain purposes. But it evi- 
dently will not serve as a basis for a distinction between 
land wealth and other wealth, since not the extractive indus- 
tries alone, but all industries, employ land; and since all 
extractive industries make, under present conditions, use of 
capital. Even as a distinction of degree it will not hold; 
some of the extractive industries, mining for example, are 
pronouncedly, even prevailingly, capital-using in their tech- 
nique : and even the most simple and primitive of extractive 
employments make appreciable use of non-land instru- 
ments. 

It is, however, none the less true that not merely food 
and raw material, but building-sites, standing-room, air, 
climate, scenery, neighborhood, etc., are markedly and em- 
phatically of land character or of land origin. And it is 
equally unquestionable that capital goods achieve some 
things not attainable through any possible substitute, pre- 
cisely as other commodities are in a peculiar degree, or exclu- 
sively, dependent on labor. You cannot have timber from 
labor or capital; neither land nor capital will dance you a 
skirt dance ; and if you desire a certain peculiar quality of 
screeching, you must resort to a phonograph or to a calliope 
as against any form of land or labor. 

But note once again how purely technological all of 
this is; for while it is true that labor and capital, when 
denied recourse to land in the non-value and purely con- 
crete and physical sense, will yield no timber, it is at the 
same time true that they will give timber plenti- 
fully enough if strictly limited in their application to 
valueless land, that is, if confined to what, in the economic 



128 VALUE AND DISTRIBUTION 

and value sense, is no-land. And some day the technology 
of timber production may make of timber a laboratory 
product. 

And it is all the while to be remembered that these tech- 
nological differences and specializations, while of unques- 
tionable actuality, are, in fact, as marked between one item 
of land and another, or between one item of capital goods 
and another, or between one laborer and another, as between 
capital goods and labor, labor and land, or land and capital. 
For market purposes agricultural machinery is more closely 
akin to wheat land than to machinery for watch or chro- 
nometer production; cotton lands are, from the same point 
of view, more like sheep than like timber lands or iron 
lands, or wheat lands; in point of products, violin and sea 
are not more unlike than virtuoso and sailor, or than prima 
donna and stoker. 

In truth, also, if productive factors are to be distin- 
guished according to technological considerations, not two 
or three but countless categories of productive factors will 
have to be recognized.^ 

But in point of degree of technological ^ specialization, is 
this threefold classification better founded? Capital is, for 

'It must, however, be admitted that this does not quite cover the 
difficulty ; nor at this stage of the discussion is adequate treatment of 
the difficulty readily possible. 

For, after all is said, it must remain true that, technologically con- 
sidered, as mechanical and instrumental facts, a broad and general dis- 
tinction between land and other production goods will require recogni- 
tion. But it is the more necessary to determine the precise purposes 
for which the distinction is important, and the extent and accuracy 
with which the distinction applies. To perform this service fully 
must, however, be left to a later chapter. (See chap, xxiii.) 

That the law of diminishing returns applies only to land, or at all 
events applies with some especial force or in some peculiar manner to 
land, is a conviction appealing strongly to careful thinkers as warrant- 
ing the distinction between land and other instrumental goods. 

It is, for example, clear that Malthus was right in insisting that, 
as long as the human race must depend upon agriculture for its food. 



* Etymologically speaking, there are manifest objections to this 
use of the term "technological" as referring especially to capital 
regarded in the mechanical and industrial sense ; but no better term 
seems to be at hand. 



THE CAPITAL CONCEPT 129 

example, said to be mobile, not spatially alone, but in indus- 
trial applications in general. In point of fact, no distinction 
in this regard, other than of degree, has been anywhere 
urged or attempted; and evidently any distinction along 

so long population cannot continually multiply without somewhere 
coming upon the harsh pressure of the subsistence limit. And it is true 
also that this is due to the existing limitation upon the land supply — 
elastic limits possibly, but none the less real and permanent. Land 
cannot be harder and harder pushed for product excepting upon terms 
of less and less generous response. 

Postponing for a moment the question of why this is, it is first to 
be noted that the fact is not only primarily social in significance, but 
is also a fact the significance of which is purely by forecast or 
prophecy. While the private and competitive cultivation of land is 
interested solely in the value of the product, and is interested in the 
volume of the product only as bearing upon its value, this Malthusian 
discussion adopts purely a social point of view, regards the food 
product not as value but as volume, and concerns itself not with the 
present time, but with later centuries. That is to say, the law of 
diminishing returns is, for Malthusian purposes, a social law in the 
dynamics of production, and a law having no concern with value 
problems or with any distributive problem present or future. 

Doubtless, however, the botanical or zoological or agricultural facts 
upon which Malthus based his doctrine in social dynamics may afford a 
sufficient basis for inferring other laws for present problems of com- 
petitive activities and of market values. 

Surely there could be no such thing as land rent, were there no 
limit upon the supply of land ; but this is merely to say that all value, 
whether for land or for machines, or for shoes, or for hats, exists only 
as dependent upon some degree of scarcity. 

And surely, if, with any given piece of land, increased expenditure 
in non-land directions were not attended with a costantly falling com- 
pensation both in volume and in value, there could be no land scarcity 
and no land value. But this is equally true of mowing machines or 
horse rakes : so, if one pound of phosphate would suffice to fertilize a 
continent of land, phosphate would be safe from ever becoming dear in 
price ; or if one hour of labor would do all the work to be done, labor 
and its products could manifest no rarity. 

If the cultivator will apply all his outlays to land only infinitesimally 
under the margin — that is, to land unlimited, rentless, and valueless — 
no difficulty will be experienced in getting returns proportionate to out- 
lays ; in truth, not in the value sense here but only in the technological 
sense is land being cultivated ; as none is used, none is paid for. But 
if, with land that is valuable, only the non-land expenses of production 
are doubled, there must result less than a doubled product : the pro- 
duction undertaking as a whole was not doubled. If this fact is all 
that is intended to be formulated under the competitive rendering of 
the law of diminishing returns, the law must be pronounced to be 
axiomatically valid, but valid equally for capital instruments and for 
labor agents in all their various combinations. Each case under the 



I30 VALUE AND DISTRIBUTION 

this line must be of a most hazy sort, as applied to dis- 
tinguish, one from another, land, capital, and labor. It is, 
indeed, true that capital is commonly declared to possess 
a mobility far surpassing that of labor or of land ; but capi- 

law stands as mere illustration of the fact that if only a part of the 
productive factors are increased, the product will not respond with the 
same increase as if all the factors were doubled. 

But the law is often formulated to assert that if the applications 
of expense to the land are doubled, but not the land, the extra 
returns will fail of proportion to the increased expense. And this 
formulation of the law is also valid, even if not quite axiomatic ; 
proper proportions of land value with other values must be maintained, 
or the returns will be a disappointment ; a bad combination gives 
bad results. 

But this also all holds equally for capital goods and for labor. 
Too much or too little of any productive factor, relatively to the others, 
gives bad results. So far, then, nothing has yet presented itself in the 
field of current, competitive value production to justify any line of dis- 
tinction between land capital and other capital. And it is now to be 
added that for most purposes in production, land, labor, and capital 
may be used as substitutes one for another. Just as the original 
qualities of the soil may be exhausted by withholding of upkeep, so 
they may be replaced and renewed by capital expense ; the poorest of 
land may be made into good land, if only sufficient capital expense be 
applied. And precisely as machinery may take the place of labor, or 
labor of machinery, so more labor may often be hired rather than 
more land rented or more machinery purchased ; or, again, more 
capital expense may be applied to a given holding of land rather than 
more labor hired or more land rented. 

This is constantly illustrated in actual farming ; one farmer rents 
more land or better land and thus, through his larger rent outlay, 
excuses himself from correspondingly large outlays for machinery or 
fertilizers or labor ; another farmer iinds it to his advantage to restrict 
himself in rent outlays and to extend his investment in the direction 
of capital goods or labor. 

But that at the margin this principle of substitution holds, and 
even that transportation activity or improvements in agricultural tech- 
nique may have the effect either to increase the land supply or to make 
more effective the existing supply, does not prove that the principle 
of substitution is indefinitely applicable at no matter how distant removes 
from the margin of substitution ; for were such the truth, there could 
be nowhere any disadvantage from an increase of capital expense upon 
a fixed supply of land, or any loss from twenty laborers working with 
one loom, or any reason why indefinite wagons should not dispense with 
the need of horses or drivers. 

For it is clear that in the main the relation between the different 
production goods is one of complementarity and interdependence rather 
than of the infinite possibility of substitution. More men and more 
machinery may make call for more land rather than for less, or for 
the old land at a higher rate of rental. Machinery does not displace 
men indefinitely, but, under stable conditions of technique, calls instead 
for men to fashion or to tend ; wagons furnish demand for drivers, ships 
for sailors„horses for drivers, drivers for wagons, and so on without limit. 



THE CAPITAL CONCEPT 131 

tal used in this connection points to something distinctly 
non-technological in nature. Some of this capital mani- 
fests its quality of mobility simply because it is unspecial- 
ized in application ; it is money, demand credits, funds in 

Stopping to note, however, that there is in these facts no war- 
rant for the threefold division of productive factors, since it is 
equally true that bricklayers furnish a demand for hod-carriers, car- 
penters for masons, wagons for horses, sailors for cooks, engines for 
cars, rails for ties, meadow land for pasture, and both of these last for 
timber lands, and so on indefinitely, we return to our postponed ques- 
tion, why does the point always arrive at which nothing serves as a 
substitute for more land, — a point, that is, at which more and more 
intensive cultivation gives more and more meager returns ? To what 
particular attribute of land is this to be ascribed? And, for that 
matter, to what quality or characterisitc of machinery is it due that 
only so many men can work with one unit of capital goods? 

The answer must be shortly given and be left to approve itself: 
the one attribute of land which finally discourages all attempts at sub- 
stitution and assures to land its ultimate relation of complementarity, 
appears to be the spatial attribute, the impossibility of compressing 
agricultural or building or climatic or scenic aspects of land utility 
into ever-smaller compass and without limit of disadvantage. 

With machinery as related to labor, the spatial fact seems to be 
sometimes important ; but the complementarity more commonly traces 
to the recurrent necessity, in all machine processes, for the interven- 
tion of volition and direction. 

In further enforcement of the truth that there is in this common 
and general fact of complementarity no slightest support for the three- 
fold division of productive factors, it may suffice to recall that a 
parallel necessity exists for supervisory and directive labor to go with 
unskilled labor, that many different occupations occupy the comple- 
mentary relation one to another, and that in a general way each grade 
of labor is complementary to most other grades. 

Despite the consistently private-acquisitive nature of the capital 
concept adopted by Professor Carver in his Distribution, and despite 
his fundamental thesis that all agent remunerations are received upon 
the basis and by the measure of their marginal value productivity, he 
yet finds it possible to distinguish land from capital. The basis of his 
distinction is technological so far as it is not imposed by certain doctri- 
nal exigencies on the side of costs : and yet the following is from 
Carver's Distribution : 

"There are various kinds of labor, of land, and of capital. Two 
different kinds of labor may be performing functions which differ 
almost as widely as those performed by labor and capital, or by labor 
and land. The work of a bookkeeper differs as widely from that of a 
ditch-digger, as that of a ditch-digger does from that of a steam 
shovel. Therefore, the same reasons which favor the separation of 
labor and capital, in order that they be treated as distinct factors, will 
also favor the separation of one kind of labor from another, or one kind 
of capital from another, and of one kind of land from another" 
(p. 8s). 



132 VALUE AND DISTRIBUTION 

general — abstract capital in the accurate sense of the term, 
mobile, fluid, unspecialized purchasing power — a capital cate- 
gory of surpassing importance, and later to receive most 
careful examination; other of this capital is such by the 
fact that, like stocks of goods, it is readily, speedily, and 
advantageously marketable, and so, private-wise viewed, is 
easily, through sale, turned into the abstract condition as an 
intermediate form, and thence into whatever else the private 
owner may desire. 

But evidently, in this last sense of mobility all forms of 
capital and all wealth of any sort are mobile in different 
degrees; all — as valuable — are salable on some terms and 
at some time. 

But as a technological fact, capital is not characterized 
beyond land or labor by mobility; it is even questionable 
whether it is not the most specialized, the least mobile, of 
the three. Some machinery — indeed, much machinery — is 
serviceable for only one purpose or in only one line of pro- 
duction, and is only at great, or even at entire loss, to be 
readapted to another use; and this is true, in varying 
degrees, of all the different forms and conditions of capital 
goods, of labor, and of land. Neither mobility nor immo- 
bility can be, in this technological sense, regarded 
as peculiarly a characteristic of any one class of productive 
agents. 

But how about spatial mobility? There is, possibly, a 
distinction of degree : laborers do migrate, though so tardily 
as to have given them the traditional stamp of marked 
immobility. Land is, physically and spatially speaking, of 
pronounced immobility ; capital is mobile in varying degrees 
accordingly as it has become attached to the land or incor- 
porated with it; improvements in mines or in water-powers 
are prone to stay where they are originally placed; while, 
on the other hand, by carting of loam and by grading, by 
filling of swamps and of water fronts, to say nothing of the 
action of winds, the seeming fixity of land is appreciably 
disturbed. 



THE CAPITAL CONCEPT 133 

This seeming fact of fixity in land appears, then, to 
have Httle in it, otherwise than as a matter of mere extension 
or superficies ; and as to this question of superficies it is fair 
to say that it is in no sense the point at issue; for, in its 
aspect of effectiveness for production — its technological 
significance — land can be worn out, displaced, or renewed, 
as readily, as capital, and sometimes much the more quickly.^ 

There appears to be more in the notion that land pre- 
sents an especial degree of fixity, or at all events of inelas- 
ticity, in supply. And it must be admitted that, in any given 
state of industrial technique, this fact of relative inelas- 
ticity may hold. While it is true that there is today no poor 
land that capital will not make into good land, that moun- 
tains may by capital expense be razed, valleys filled, dry 
land created out of swamp, or river, or lake, or ocean, it 
remains true that this is merely a substitution of capital for 
land, that it is a limited process by reason of the fact that 
capital is at any time a limited quantity, and that, after all, 
the opportunities for the profitable application of capital to 
land are, by the very reason of this deficiency of capital, 
limited both in quantity and in quality, and, as such, con- 
tinue to be scarce and valuable. 

But in last analysis all this is merely to assert that both 

^ With these spatial qualities of land are more or less closely 
associated certain legal, jurisdictional, and territorial aspects possess- 
ing great social and institutional significance. It is, in truth, a com- 
monplace that the civil law of England, and in large measure the 
economic, political, and social organizations, trace their origin back to 
feudalism, a system in which land ownership was the controlling and 
directing fact for almost all purposes, political and economic, theo- 
retical and practical. The line of cleavage between real property and 
personal property runs deep through all English jurisprudence. 

It would, then, be a most interesting investigation — if only one 
had the necessary learning — to trace out the manner and degree of 
connection between the legal distinction of realty from personalty and 
the economic distinction of land from capital. That the parallelism 
is more than merely fortuitous may be taken as beyond doubt. 

It only remains, then, to inquire whether the common-law distinc- 
tion between real property and personal property recommends itself as 
in any way essential or necessary, or can point to other than a purely 
historical explanation or warrant ; Roman law and the derivative sys- 
tems suffice for testimony to the contrary. 



134 VALUE AND DISTRIBUTION 

land and capital are similarly limited in quantity, and are 
thereby scarce and valuable, and that the device of substitu- 
tion is not indefinitely applicable; if, then, any real distinc- 
tion is to be established, it must be based upon the fact that 
with the passing of time, differences of tendency with regard 
to supply come to characterize land and capital respectively. 
And it must be admitted that land appears likely, in the 
long future, to manifest a peculiar degree of inelasticity in 
supply, of which fact of inelasticity the law of diminishing 
returns in its ordinary formulation will be a probable 
expression, and the menace of overpopulation is a socio- 
logical inference. 

But it must be noted, (i) that all this is matter of 
prophecy, and (2) that instead of approaching, as is ordi- 
narily assumed, to moral certainty, it is not much better 
than conjecture. The past three or four hundred years 
appear to have presented the phenomenon of increasing 
land-plenty relatively to labor and capital; with the forces 
of exploration and of developing transportation, new sup- 
plies of land have far outrun the increase of population ; 
elasticity has, indeed, in a surpassing degree — probably, it 
is true, hardly again to be duplicated — characterized the 
land supply. Capital meanwhile appears not to have 
increased beyond the expansion of demand afforded by the 
increase of land supply and the growth of population, 
since interest appears to have been, in some countries of 
Europe, as low one hundred and fifty years ago as today, 
then, with advancing capitalistic opportunities, to have 
risen, now, with the progressive exhaustion of the new 
opportunities offered by increasing population and enlar- 
ging land supply, to be again falling. Thus, while it seems 
probable that the future will meet an especial shortage in 
land supply, this is not at all certain. Food may, for aught 
we know to the contrary, one day become a laboratory prod- 
uct. "It is ... . possible that chemistry may some 
time solve the problem of food production without recourse 
to agricultural methods. The secret once learned, the 



THE CAPITAL CONCEPT I3S 

nitrogen in the air of the back yard and the ton of coal in 
the bin may furnish food for an ordinary family for a 
year." ^ And it is to be added that in the future, as in the 
past, much will be accomplished by improving transportation 
to mitigate, if not to prevent, the conjectural dearth of land. 

But, having, for the time being, and in a very broad and 
general way, accepted, for purposes of retrospect or of 
prospect, the tenability of the distinction between land and 
other instrumental goods, we have thereby the more to 
recognize the difficulty that expanding knowledge, — develop- 
ment in the human factor of production,— or improving 
transportation — development in both the human and the 
capital factors — may function technologically as substitute 
for land. Bettering transportation is more land; true, geo- 
graphically speaking, land is not made, but accessibility is 
made, and upon an enormous scale: land sufficiency, like 
land value, is in large measure positional. 

But further : if, as technological facts, these probabilities 
in the dynamic field are taken to justify, for purposes of 
economic theory, a separate category of land wealth as 
against other wealth, there is forthwith to be undertaken 
an indefinitely large task of further classification or of sub- 
classification ; for while grain land may be becoming seriously 
scant, range lands, or champagne lands, or mines, or fish- 
eries may disclose a contrary tendency. So, also, while the 
provision of wooden implements is becoming increasingly 
inadequate, the different sorts of machinery and tools of 
metallic material may be growing progressively cheap; and 
meanwhile electrical apparatus is likely to abound. And 
similarly for the human factor ; as one quality of man, say 
the athlete or the unskilled workman, is becoming relatively 
scarce, doctors of philosophy may more than generously 
multiply. 

Technological classification, then, on the basis of the 
supply outlook, is a hopeless undertaking. We have even 

' Davenport, Outlines of Economic Theory, p. 324. 



136 VALUE AND DISTRIBUTION 

come to question whether, technologically speaking, human 
labor itself is a tenable economic category. 

A further argument in support of this threefold classi- 
fication now requires attention — the retrospective and 
genetic view, the argument from origins. 

Pausing merely to question whether, as bearing upon 
the classification of the factors of production — a techno- 
logical problem — questions of origin are logically germane, 
it is nevertheless to be recognized that the genetic view, 
whether or not acceptable as a technological view, possesses, 
for certain purposes, great importance. The only query is 
whether these purposes are economic in bearing as dis- 
tinguished from historical or sociological. 

Not all wealth was created by man. It need not be 
here disputed whether capital preceded labor, or the 
other way about. It looks, truly, as if environment were 
present as early, at least, as was man. At any rate, there 
exist unproduced riches ; only the presence of man, his 
needs or desires, and not his productive activity, is neces- 
sary to the emergence of some forms of wealth. Utility 
being a relationship between a human want and an objective 
(external?) fact, it suffices that both terms of the relation- 
ship be present in order that wealth come into being. 

Land, then, according to this genetic view, is conceived 
as the original environmental situation, capital as a human, 
a labor-produced, addition. It is argued that man, in his 
reactions upon his environment, has imposed some modifi- 
cations upon the original situation; and it is urged that 
such changes in the environment as have not been due to 
environment itself are properly to be attributed to man; 
capital is thus conceived as this intermediate term — this 
aggregate of modifications, so far at least as these modifi- 
cations have been advantageous. 

There is no denying the logical adequacy of this point 
of view; but from any other point of view than this of 
logical and schematic accuracy, the distinction will not 



THE CAPITAL CONCEPT 137 

serve; it leads nowhere when an attempt is made to apply 
it. From among all the changes of all the ages, who can 
assume to tell what environmental changes have been due 
to environmental processes as against human agencies? 
What part, for instance, of the fertility or the infertility of 
the land has been due to its treatment at the hands of man, 
to his fertilizings, his exhaustings, and his denudings ; what 
part to fostering or wasting winds, to corals, to birds, to bugs, 
to worms, to microbes ? What share of the value of the house 
traces back to the timber values of the natural forest, and 
what part to industrial processes? Even with the case of 
machinery, the typical form of capital, human wisdom 
would fall far short of distributing the final value between 
the original ore value as against the labor value, the coal 
value, and the timber value ; nor, for any one of these vari- 
ous shares, would it be possible to determine how far land 
rents, as expressed in warehouse and transportation 
charges, have counted in the case. And finally, if anyone 
could succeed in this allotment of origin-credits, either for 
the land or for the warehouse, is it to be supposed that, as 
shares in the total hire of the machine, these remunerations 
would forthwith, either in the collective or in the competi- 
tive reckoning, take on a new relation to the cost of the 
product or to its value ? '^ 

'' Senior was fully aware of all this — as a difficulty — but did not see 
precisely what to do with it : "It is difficult to point out an article, 
however simple, that can be exposed to sale without the concurrence, 
direct or indirect, of many hundred, or, more frequently, of many 
thousand, different producers, almost every one of whom will be found 
to have been aided by some monopolized agent. There are few things 
of which the price seems to consist more exclusively of wages and 
profits than a watch [MacCulloch's favorite example] ; but if we trace 
it from the mine to the pocket of the purchaser, we shall be struck by 
the payment of rent .... at every stage of its progress. Rent was 
paid for the privilege of extracting from the mines the metals of which 
it is composed ; for the land which afforded the materials of the ships 
in which those metals were transported to an English port ; for the 
wharves at which they were landed, and the warehouses where they 
were exposed for sale ; the watchmaker pays a rent for the land covered 
by his manufactories, and the retailer for that on which his shop is 
situated. The miner, the shipwright, the housebuilder, and the watch- 
maker, all use implements formed of materials produced by the same 
processes as the materials of the watch, and subject also in their 



138 VALUE AND DISTRIBUTION 

But is there, after all, nothing for theoretical purposes, 
in any of these technological distinctions, as bearing upon 
the classification of productive factors? What, for example, 
does the socialist mean in his demand that all capital be 
owned by society? Note, however, that he as often insists 
that all instruments of production be socialized, and in this 
way of putting it denies, or at least ignores, all distinctions 
between land wealth and other wealth. The line of distinc- 
tion is substantially that of the traditional separation of 
consumption from production goods; land and capital are 
equally included within production goods and are equally 
excluded from consumption goods ; they are intermediate 
instrumental goods. 

It may as well be said forthwith that this distinction 
between production goods and consumption goods is 
serviceful for many purposes : it will be the task of later 

different stages to similar payments of rent When we speak, 

therefore, of a class of commodities as produced under circumstances 
of equal competition, or as the result of labor and abstinence, unas- 
sisted by any other appropriated agent, and consider their price as 
equal to the sum of wages and profits that must be paid for their pro- 
duction, we do not mean to state that any such commodities exist, but 
that, if they did exist, such would be the laws by which their prices 

would be regulated We may be asked, then, whether the 

improvements which form the greater part of the value of the soil of 
every well-cultivated district are all, and forever, to be termed capital ; 
whether the payments received from his tenants by the present owner 
of a Lincolnshire estate, reclaimed by the Romans from the sea, are 
to be termed not rent, but profit on the capital which was expended 
fifteen hundred years ago. The answer is, that for all useful purposes 
the distinction of profit from rent ceases as soon as the capital, from 
which a given revenue arises, has become, whether by gift or by inherit- 
ance, the property of a person to whose abstinence and exertions it did 
not owe its creation. The revenue arising from a dock, or a wharf, or 
a canal, is profit in the hands of the original constructor. It is the 
reward of his abstinence in having employed capital for the purposes 
of production instead of those of enjoyment. But in the hands of his 
heir it has all the attributes of rent. It is to him the gift of fortune, 
not the result of a sacrifice. It may be said, indeed, that such a 
revenue is the reward for the owner's abstinence in not selling the dock 
or the canal and spending its price in enjoyment. But the same 
remark applies to every species of transferable property. Every estate 
may be sold, and the purchase money wasted. If the last basis of 
classification were adopted, the greater part of what every political 
economist has termed rent must be called profit." — Senior, Political 
Economy, 6th ed, (London), pp. 112-29, passim. 



THE CAPITAL CONCEPT 139 

pages not to attack it but, through a more careful reformu- 
lation of the productivity concept, to extend it. But mean- 
while it is necessary again to point out that, as a 
technological classification, the distinction holds only as 
socially viewed. Private interests have little occasion for 
the distinction; productivity for competitive purposes is 
quite another thing from technological productivity. 

But now, finally, even if it be possible, from the point of 
view of origins, to establish between land wealth and other 
wealth distinctions at once theoretically tangible and prac- 
ticably workable — and even admitting that the techno- 
logical outlook is so far clear and its problems so far 
susceptible of present formulation, as to make the distinction 
one of manifest relevancy to the welfare outlook and of 
definite significance for the terms of the future situation 
within which the value and distribution problems must one 
day be worked out, — admitting, that is to say, that over long 
intervals of time, in the dynamics of value and of distribu- 
tion, important tendencies are especially associated with the 
land category, is it at the same time at all to be admitted that 
in any current investigation of the process of present value 
fixation — the value problem in cross-section — these possible 
or probable outlooks, these long-time prophecies, have any 
bearing to suggest that, in a competitive society, the pro- 
ductive powers of land are differently remunerated, or bear 
a relation to costs and to values different from other 
productive powers and agents ? If it were proved, or other- 
wise accepted, that labor is likely to get more scarce, would 
this suffice to exclude present-day wage outlays from 
present-day costs? Some difficult problems with regard to 
the capital concept and to the basis of interest may be 
avoided through holding in mind that our problem is the 
value problem, and that the correct formulation of the 
capital concept is primarily and chiefly important as bearing 
on this problem. Laborers may get more numerous and 
more skilful or less skilful; capital goods may increase 



I40 VALUE AND DISTRIBUTION 

relatively to other productive agents, or possibly decrease; 
land may get better or worse with climatic or other changes, 
and relatively to the situation become more or less abundant 
or more or less adequate ; but in each new situation there 
will be nothing new but the situation and the distributive 
outcome; the value problem in its setting of new terms will 
remain in principles, and in methods of analysis, the same 
problem.® 

* Not only with students, but in economic literature, does this dis- 
tinction between the static analysis and the dynamic aspects of the 
conditions under which the static analysis is to be applied, present 
itself as the occasion of great perplexity. But if for no other reason, 
the purely problematic quality of these dynamic forecasts should suffice 
to deny them a controlling influence in value theory. Take it, indeed, 
as true that during the last few centuries of exploration and of develop- 
ing transportation, new supplies of land have far outrun the increase 
of population, that elasticity has especially characterized the land 
supply ; or take the contrary of all this for true ; what of it, for 
purposes of rent as an element then or now in the cost computation? 
or how does the past trend of the interest rate, or the probable future 
trend, bear upon the question as to whether interest shall or shall not 
at any given time rank as an element of cost ? By virtue of wars suffi- 
ciently grievous and of plagues sufficiently decimating, population may 
turn toward decrease ; would wages then become no part of cost, 
though now, and for any probable future, they are accepted as properly 
included? And how, again, if the late tendencies toward a restricted 
birth rate become still more marked? Will then a new value doctrine 
have to be recognized, or will it be merely true that the old doctrine 
will remain valid for a new application under the new setting of the 
changed conditions? 



CHAPTER XI 
CAPITAL AS A COMPETITIVE CONCEPT 

It is chiefly as bearing upon cost of production in its 
relation to market values, that the concept of capital becomes 
of surpassing concern in theoretical economics. And regarded 
from this point of view, the field of investigation widens 
surprisingly : What are the relations of capital hire to 
market prices ? Is a tenable distinction to be drawn between 
these and rent outlays on the one hand, and wage outlays 
on the other? Or, so far as cost and value purposes are 
concerned, might not rent or wages be logically extended 
to cover all forms of remuneration to any sort of produc- 
tive agent or instrument? In fact, is cost of production an 
everyday business concept, or is it something peculiar to 
economic analysis? And if this latter, are capital outlays 
to be confined only to expenditures for the use of inter- 
mediate goods in the time aspect, or are they to include all 
forms of burden and subtraction imposed upon the capital 
reserves of the entrepreneur producer in the business pro- 
cess of supplying goods to the market? In sum, may we 
not, for cost purposes, accept a point of view of capital 
which regards it solely as the source of expenditure — 
capital conceived in such fashion that interest payments are 
to be regarded as paid from it rather than for the use of it, 
and that rent outlays are as truly burdens upon it — and cost 
elements under it — as were outlays ever burdens or 
costs, whether under the later theory, or under the earlier 
wage-fund capital notion, with its attendant wage-capital 
cost outlay ? 

And further: having recognized hires of labor, of land 
instruments, and of all other instruments as equally cost 
outlays, must we not likewise go on to recognize, as also 
of cost relevancy, the question of when these various hire 

141 



142 VALUE AND DISTRIBUTION 

outlays have to be met, and of the time elapsing between 
the expenditure and their recoupment by sale? 

Not at all denying- that, for certain purposes, capital has 
rightly been and must continue to be discussed as a social 
category, as production goods, it is intended sharply to 
raise the question whether this concept of capital has any 
significance for the cost-of-production analysis or for any 
purpose connected with the value problem — whether, also, 
the social concept of capital, the purely industrial and 
mechanical and non-competitive concept, is not entirely 
irrelevant to the processes of competitive society and of 
entrepreneur production, and to the thought and conduct 
of the actual business world. 

It is doubtless true that classical economics contains a 
considerable number of distinct and antagonistic concepts 
of cost, but it is none the less true that whenever the argu- 
ment shifts from the Crusoe discussion to the competitive 
market, and becomes definite in its analysis and tangible in 
its applications, the concepts of time cost and pain cost 
somehow shade off, as we have seen, into some aspect of 
\ahor-value cost as the basis of employer's outlay; or, as 
especially with Ricardo, by regarding pain cost as the basis 
and explanation of the remuneration to the wage-earner 
and thereby of the wage outlay to the entrepreneur, values 
are made, through the mechanism of entrepreneur costs, to 
be proportional to the labor-pain investment in produc- 
tion. 

Whether or not labor was thus susceptible of reduction 
to a common denominator either of pain or of time, and, 
even if so, whether labor could serve as the ultimate expla- 
nation of the very evident market reduction of it to the 
common denominator of money wages, and whether or not 
Ricardo's marginal device for getting rent payments out of 
the category of price-determining costs may in any view be 
accepted, it remains in any case clear that Ricardo's reckon- 
ing of costs is essentially a business man's computation as 



CAPITAL AS A COMPETITIVE CONCEPT 143 

a question of money outlays — outlays of the sort 
which a business man always reckons as demands upon 
business capital, outlays of the sort which the trading or 
manufacturing corporation provides for through its sub- 
scribed capital or through capital-borrowings upon the 
market. And it is in this sense, and rightly, but only in 
this sense, that wages may be spoken of as paid out of 
capital; but in this sense also raw materials are purchased 
out of capital — office furniture purchased out of capital ; 
business connections, insurance, and advertising paid for out 
of capital; in this sense interest and rent are paid out of 
capital; and so likewise with all other business expenses 
incurred in the process of getting goods upon the market. 
This concept of capital is now to be presented as the only 
concept which can be articulated with the business world's 
notion of cost of production, and the only concept which, in 
the development of economic theory or in close economic 
analysis, can be regarded as having any relevancy to those 
cost-of-production considerations which have to do with 
an inquiry into price and value. And again be it repeated 
that it is chiefly as bearing upon the value problem that the 
need exists for a re-examination of the capital concept. 

Social capital and competitive capital. — Whatever might 
be the accepted theory of value in a collectivist society — 
whether a labor theory or a utility theory, or quite as possi- 
bly no theory at all and no need of any — it is clear that 
differences in land as used for productive purposes would 
receive recognition; per item of product obtained, outlays 
upon some land would be appreciably lower than upon other 
land. It is equally clear that some of the product of this 
society would need be saved as raw material or as tools for 
further production; but it is not clear that' these saved 
products would be exclusively traceable either to land or to 
labor; in fact, it is certain that some labor product would 
get embodied in the land, and that some land product would 
be traceable in all or nearly all forms of collectivist wealth, 



144 VALUE AND DISTRIBUTION 

whether of the production or of the consumption type. 
Probably, however, in any given situation of environmental 
conditions, distinctions between wealth as land product and 
wealth as labor product would not, to this coUectivist 
society, be especially interesting, — the problem all the while 
remaining one of how to get the best results out of the 
various forms of wealth at hand. If, however, the society 
were semi-predatory in character, and were making com- 
parison of different habitats to be contested for, it might 
well find itself at indifference as between one habitat of 
poor original quality and of medium ameliorations, but 
with great store of agricultural appliances, as against 
another of great natural fertility, an inferior measure of 
land amelioration, and very defective agricultural appli- 
ances. So, in the application of its labor power, land at one 
time, and at another time the tools and appliances of culti- 
vation, might lead in the call for reinforcement. In short, a 
coUectivist society would not need to, and could not if it 
needed, distribute its productive possessions into land and 
capital categories. 

As this society would be without competitive production 
and without competitive markets, it would have no need for 
exchange-value methods or measures. Production would 
take place according to some sort of utility standard in 
consumption, and productive agents would be rated in esteem 
according to their efficiency in utility creation. Land agents 
and capital agents would stand on a common basis of esti- 
mation. The different members of the society being 
regarded as substantially equal, both production and con- 
sumption would necessarily be worked out according to 
considerations of utility — marginal utility, of a vague and 
average sort doubtless — instead of, as now, according to 
exchange values, wherein purchasing power, and not utility 
(excepting as utility may more or less affect the purchasing 
disposition), selects the consumers and determines the 
direction of production. 

Under such conditions, what portion of the social posses- 



CAPITAL AS A COMPETITIVE CONCEPT 145 

sions would rank as capital, and what would be the the 
essential meaning of the concept? In accurate analysis, 
would it be possible to accept the technological notion of 
capital as comprising all wealth held for purposes of further 
production — all technologically intermediate products — in 
the ordinary industrial sense, productive wealth, non-con- 
sumption goods? Would the time element count for any- 
thing, in other than this industrial-mechanical aspect? Or 
must all wealth be regarded as capital ? How about the ice 
stored till summer; or the wine aging in the collectivist 
vaults ; or the wheat stored for winter ; or the total of con- 
sumption goods waiting the time of maximum service in 
consumption ? 

It is past question that, especially with capital socially 
viewed, the earlier notions of capital, like the later, have 
not merely referred capital to productivity, but have inter- 
preted productivity in the light of technological applica- 
tions, and as, on the whole or mainly, a technological 
phenomenon, a category of instruments, tools, and appliances. 
This test once accepted, and the attempt being at the same 
time made to articulate it with the test of origins, capital 
emerged as all non-land forms of instrumental goods. But 
more and more the especial function of machinery was per- 
ceived to be the utilization of the forces and energies of the 
environment — of "nature." More and more Adam Smith's 
naive handicraft view that "no equal quantity of labor 
employed in manufactures can ever occasion as great a 
reproduction as in agriculture ; in this nature does nothing, 
man does all/' was seen to be misleading. A windmill is 
merely wealth set where natural forces will achieve, in 
> co-operation with it, or will enable it to achieve, desirable 
results. But precisely this is the case with the cider matur- 
ing to vinegar, or with the wine acquiring age and flavor, 
or with the sapling reaching up to become a tree; whereat, 
as we have seen, Ricardo was sorely puzzled, and James 
Mill blundered into a great joke. 

But it has now become clear enough that the techno- 



146 VALUE AND DISTRIBUTION 

logical concept of capital takes account of only one aspect 
of capital productivity. That the ice is melting away or the 
wine falling off in point of gallon measures is not con- 
clusive of the productivity problem. If the utility grows, 
whether by one sheep growing into two, or one small 
sheep to one large one, or one poor-mutton sheep to one of 
good quality, or one superfluous sheep to a famine-time 
sheep, there is, at least under a collectivist reckoning, eco- 
nomic productivity. So long as either the objective good 
changes its character so as to change its utility relation 
to man, or so long as man so changes in needs and desires, 
or in provisionment, as to modify the utility relation between 
goods and men, there is room for value productivity. The 
collectivist definition of capital would then run somewhat 
as follows: wealth held for increment — zvealth in time. 

However clear, then, for technological purposes, may 
be the distinction between land wealth and other wealth, 
the distinction remains mostly valueless for the theoretical 
economics of a collectivist society.^ 

Capital in the competitive sense. — Examining now some- 
what more closely the capital concept as adapted to a com- 
petitive society, we ask how far and with what modifications 
the collectivist capital concept of wealth as fund, 
wealth in time, can be made to serve for competitive pur- 
poses. There will come, at all events, this change — that we 
shall be talking in terms of exchange-value denominators, 
exchange-value production, exchange value of agents, 
exchange-value computations of gain, rather than in terms 
of average service, or of some sort of group-marginal 
utility. In a general way doubtless, technological produc- 

^ Perhaps it should go without saying that a collectivist society 
would, for this purpose, have no concern with any question of absti- 
nence, otherwise than as bearing upon the store of goods waiting to be 
named. Abstinence, so far as it applied at all, would apply to all 
forms of the society's wealth ; and all of the wealth would stand as 
capital. Abstinence would bear only upon the volume accumulated. 
But there would, of course, remain questions enough as to the forms 
and uses into which this store of wealth should be distributed. 



CAPITAL AS A COMPETITIVE CONCEPT 147 

tivity in terms of utility product will be paralleled in com- 
petitive society by a technological productivity in value 
product. But not everywhere; for it sometimes falls out, 
in competitive society, that the short output commands an 
aggregate sale value higher than the bountiful output; that 
the spices have to be sunk — mechanical destruction, but 
value creation — or that monopolistic combinations are 
formed, to the result of diminished product and higher 
prices — a plus in value, but a minus in utility. 

But none the less, such and so many productive agents, 
technologically considered, as there are in competitive 
society will, under the value denominator, rank as capital, 
whether these be land agents or other; all consumption 
goods, also, will in strict logic be so included, since all are 
held because an advantage, an increment, lies with post- 
poned consumption. Even with goods deteriorating or 
decaying, as objectively considered, the advantage is on the 
side of delay; it is not conclusive that half the apples stored 
in the cellar will rot, or that the ice in the shed will lose 
half its weight before summer.^ 

^ Up to this point Professor Fetter's views seem to be in the main 
worthy of acceptance. However, his formulation of capital as material 
goods conceived in one aspect, their market value, does not quite accu- 
rately apply, and, indeed, was not intended to apply, to the collectivist 
economy ; market value is not a collectivist category. As applied to 
competitive society, the formulation appears to be much too narrow, 
the criticism centering mostly upon the word "material." — See Fetter. 
Quarterly Journal of Economics, November, 1900; May, 1901 ; Novem- 
ber, 1902. 

But in his Principles, Professor Fetter occasionally manifests small - 
faith in this requirement of materiality : "Capital today may be 
defined as economic wealth expressed in terms of the general unit of 
value" (p. 115) ; a definition wide enough to include immaterial goods 
privately owned; and on page 129 it is said: "Men seek to convert into 
marketable capital any increase of income in their wealth or busi- 
ness The basis of capital value is income, and whatever be 

its cause, political or economic, material income can and will be capi- 
talized and added to the capital value of the privilege, wealth, or indus- 
try on which the income is conditioned." 

But, interpreting this definition given on page 115, it is said: "By 
this definition, capital at any given moment of time includes all eco- 
nomic goods in existence, when they are thought of in terms of 

their value. But things have different durations Most capital 

is composed of things durable in a large degree The things 

composing capital are concrete things, scarce forms of wealth." 



148 VALUE AND DISTRIBUTION 

Perhaps this is all that need be said for capital in a com- 
petitive society, so far as there is occasion or justification 
for a distinctly social concept for capital in a competitive 
society; and doubtless there are for some purposes both 
occasion and justification. But for most purposes the social 
concept does not apply, simply because the activities of men 
in society are competitively and not socially organized. 

But, as a computation of competitive costs, regarded 
from the point of view of supply-determining influences 
and as having thereby bearing upon the value adjustments 
of the market, another and quite different, and even a 
radically inconsistent, concept of capital demands atten- 
tion. Actual business computations of the expenses of pro- 
duction include a wide range of expenditures made out of 
what, in the individual reckoning, stands as the total busi- 
ness investment, and functions in the terminology and 
reckoning of the business world as business capital. It is, 
for example, in the sense of Mill's doctrine, this sort of 
capital that limits labor, this sort of capital out of which 
wages are paid.^ 

^ Capital in the technological sense has evident bearing upon the 
wages of labor, not indeed by determining whether or not labor shall be 
employed — for this is in ordinary times certain, whatever may be the 
volume of capital — ^but by determining the manner and effectiveness of 
its employment, the productive equipment at its disposal, its outillage. 
It is in this sense only that capital may rightly be said to limit labor 
and to stand in causal relation to the wages of labor. But this is not 
the sense in which the term "capital" is used in the wage-fund 
doctrine ; it is there used in the sense of an employment fund, a sub- 
division of- business capital, rather than as a technological quantity ; 
in this business sense of capital, subsistence goods are properly included 
only to the extent that they are actually a part of the entrepreneurs' 
holdings ; that wage outlays, whether finally expended in subsistence or 
in other goods, are made out of the cash or banking credits in the 
employer's control, proves merely that from his point of view this cash 
or these credits must be regarded as capital. There is little connection, 
if any, and certainly no direct connection, between the volumes of 
business capital or credit in society and the real wages of labor. True, 
any one employer can hire more labor if he controls a larger business 
capital, but only upon the assumption that competing employers have 
not a like increase of capital. The old fallacy of reasoning from one to 
all is well illustrated here. And in any case, it does not follow that 
having more business capital, an employer can afford to pay, or will 
for any reason pay, a higher wage rate. 



CAPITAL AS A COMPETITIVE CONCEPT 149 

In the computation of competitive entrepreneur costs, 
that is to say, interest charges are reckoned upon something 
quite other than technological capital. Entrepreneur capital 
— capital in the guise in which the type-form of modern 
business, the corporation, presents it — includes not merely 
consumption goods in stock, but banking balances, counter 
money, funds tied up in customers' accounts and in bills 
receivable of many varieties, corporate stocks and securi- 
ties, whether held for sale or for investment, and generally 
all that fund of working capital, more or less unspecialized, 
requisite for the successful functioning of a business. The 
manufacturing entrepreneur or the corporation manager 
would find it a novel and perplexing doctrine which should 
restrict the capital investment to the buildings, machinery, 
and raw materials of the undertaking; the corporation really 
possesses nothing that is not capital. 

But it is still true that these non-technological forms of 
capital deserve not so much greater recognition than they 
have in the past received, as more careful analysis and 
classification; for, as has already been pointed out, classical 
discussion, as indeed all economic discussion, early or 
modern, is full of this entrepreneur-capital concept. 

Adam Smith, for example, rarely failing somewhere to 
formulate or to employ the correct as well as the incorrect 
doctrine on almost every economic question, is now and 
then entirely satisfactory in his treatment of the entrepre- 
neur-capital concept. Perceiving clearly that the funda- 
mental and essential characteristic of capital is found in the 
acquisitive purpose, the increment purpose, of its holding, 
and observing that individuals often gain by lending to 
others or by employing their wealth in some socially non- 
productive application — on which question of non-produc- 
tiveness he was notoriously much confused — it all the while 
remaining true that communities as isolated aggregates can 
gain only through productive processes of some sort, he 
divided acquisitive goods into the two categories, social 



ISO VALUE AND DISTRIBUTION 

and private. And out of this, as Boehm-Bawerk believes, 
has grown up the idea that private capital is connected with 
interest and is especially a category of distribution, while 
social capital belongs rather within the field of production.* 

And doubtless such an idea has developed ; but, so far as 
Adam Smith had any choice between his different idea- 
vistas, this could hardly have been the doctrine of his pref- 
erence. For the most part he was talking of private 
capital as a category of private — that is to say, of competi- 
tive — business ; not of interest-getting, but of any sort of 
gain-acquiring through business activities, whether indus- 
trial or merchandizing or what not. 

It is in this sense of entrepreneur capital that in the 
Introduction he starts off the wage- fund doctrine on its 
course with the remark: 

The number of useful and productive laborers, it will hereafter 
appear, is everywhere in proportion to the quantity of capital 
stock which is employed in setting them to work, and to the 
particular way in which it is employed. 

So, likewise, in his comparison of corn prices in England, 
France, and Poland, where he explains that, despite the 
greater productiveness of agriculture in the more advanced 
countries, the prices are rarely lower in the more advanced 
countries, since the superiority of produce commonly not 
more than balances, and often does not fully balance, the 
"greater labor and expense bestowed on them," he is 
employing a competitive, an entrepreneur, concept of cost, 
in terms of wage payments and of all outlays and disburse- 
ments in general. These outlays and disbursements are 
never made in terms of technological capital, and rarely in 
terms of laborers' supplies — consumption goods ; and for 
the purposes of Smith's argument, as well as for the entre- 
preneur's business computation, it does not at all matter in 
what form or terms the payments are made. 

And so again, in chap, vi : 

Over and above what may be sufficient to pay the price of 
materials and the wages of the workmen, something must be given 

* Positive Theory of Capital, p. 27. 



CAPITAL AS A COMPETITIVE CONCEPT 151 

for the profits of the undertaker of the work who hazards his 
stock in the adventure .... the profits of the employer upon the 
whole stock of labor and materials which he advanced. 
No employer, however, can be regarded as advancing a 
stock of labor in any other sense than that of advancing 
the wages ; Adam Smith is plainly within the concepts of 
entrepreneur cost and of entrepreneur capital. And again 
in chap, viii, on "Wages," he explains that labor is rightly 
treated as a commodity like any other; if capital is increas- 
ing faster than population, wages get the benefit; 
employers fall into sharp competition: 

The demand of those who live by wages, it is evident, cannot 
increase, but in proportion to the increase of the funds which are 
destined for wages. 

Ricardo, as we have seen, found his way over from 
real value to market value through the mechanism of entre- 
preneur competition, with its leveling and proportioning 
effects; all of his reasoning on market value goes upon 
entrepreneur costs, and thereby, tacitly or in terms, assumes 
the entrepreneur concept of capital : 

Whilst every man is free to employ his capital where he pleases, 
he will naturally seek for it that employment which is most advan- 
tageous; he will naturally be dissatisfied with a profit of 10 per 
cent, if by removing his capital he can obtain a profit of 15 per 

cent It is perhaps very difficult to trace the steps by which 

the change is effected; it is probably effected by the manufacturer 
not absolutely changing his employment, but only lessening the 

amount of capital he has in that employment The monied 

class .... are engaged in no trade, but live on the interest of 
their money, which is employed in discounting bills or in loans to 
the more industrious part of the community. The banker, too, 
employs a large capital on the same object There is per- 
haps no manufacturer, however rich, who limits his business to the 
extent that his own funds will allow; he has always some portion 
of this floating capital. When the demand for silks increases, and 
that for cloth diminishes, the clothier does not remove with his 
capital to the silk trade, but he dismisses some of the workmen, he 
discontinues his demand for the loans from bankers and monied 
men (Ricardo, Political Economy, chap, iii, sec. 33).'^ 

" If further evidence is necessary that prevailingly throughout eco- 
nomic discussion the working concept of capital is the entrepreneur 



152 VALUE AND DISTRIBUTION 

With the acceptance of this entrepreneur concept of 
capital — an acceptance not to be avoided so far as the capi- 
tal category is to retain its significance for cost-of-produc- 
tion purposes — there must evidently go the abandonment of 
the threefold division of productive factors as essential or 
important in the value analysis ; for while the technological 
distinctions may and must, to a limited degree and for 
certain purposes, hold their place, the services of the vari- 
ous factors in value production are, in competitive business, 
reduced to the common denominator of money price, stand 
with regard to entrepreneur outlay in an entirely indistin- 
guishable relation, and are paid for as costs out of one 
common fund of resources, the capital fund of the entre- 
preneur. 

All things, then, that can be traded in, or valued, or 
rented, or capitalized, may fall within the meaning of the 
capital concept. In this sense of the term, capital includes, 
in the price aspect, patents, copyrights, trade-marks, busi- 
ness connections, reputation, good-will, privilege, govern- 
ment favor, franchises, royalties, rights of toll and tribute, 
rents, annuities, mortgage rights, personal claims ; ^ and 
further, it includes monopolies of no matter how various 

concept, the citation of authors to the required degree is evidently 
impracticable here ; it remains true, however, that economic literature 
is full of his concept, particularly in those directions showing the 
strong influence of John Stuart Mill, practically all of whose cost 
analysis is of the entrepreneur type. But perhaps it may be sufficient 
again to point out that the wage-fund doctrine would be outside the 
pale of possible discussion on any other basis than this of entrepreneur 
capital. What force is there, on any classical plane of discussion, in 
calling subsistence goods capital otherwise than from the employers' 
point of view? Or what force in the distinction between fixed and 
circulating capital? Or in the doctrine as expounded that labor is 
limited by capital? At Mill's time it had become no longer possible 
to be overlooked that society was in a regime of employer production ; 
Mill accepted from the business world the business basis of reckoning — 
a computation according to competitive entrepreneur costs. Since 
Mill's time, with the exception of Cairnes's belated and reactionary 
crusade, there has been practically no systematic cost doctrine that has 
not sounded in terms of entrepreneur cost, with its implied recognition 
of the underlying concept of entrepreneur capital. 

* To deny the term "capital" to these immaterial value items, and 
to call them merely property, as would (sometimes) Fetter, does indeed 



CAPITAL AS A COMPETITIVE CONCEPT 153 

kinds and degrees, so far as they may become the subject 
of invested cost in obtaining them, so far as they are 
bought and sold as steps in competitive-productive invest- 
ment, or are vendible upon the market as capitalized divi- 
dend-paying properties. All of these are capital for our 
present purposes, the value investigation, since they get into 
costs in the actual competitive market production of such 
commodities — hats, wheat, machinery, stocks, etc. — as are 
actually marketed. All things which, from the entrepreneur 
point of view, appear to be expedient expenditure for the 
purposes of creating either a commodity or a situation of 
market value are outlays of capital taking rank as costs of 
production. When the purchase of machinery is an advis- 
able move in business policy, capital goes into it, as at 
another time into land or labor; when, in good busi- 
ness policy, a franchise must be had or a patent procured, 
capital is, in either case, so directed as to accomplish the 
necessary thing. When, for equally cogent business rea- 
sons, legislatures or city councils must be bought, the neces- 
sary outlays are, for cost and value purposes, precisely like 
expenditures for machinery or for the control of patented 
processes ; tramway franchises and sugar-refining tariffs, as 
situations business-wise obtained by the expenditure of 
capital, disclose in the current market values of the stock 
the present worth of the forecasted gains. So the expenses 
of stifling competition are capital outlays, invested as the 
costs of a monopoly to be obtained; so also the tribute paid 
to escape cut-throat competition is a capital cost of pro- 
duction,'^ 

That for purposes of competitive production the only 
important fact for cost is the outlay, and not at all the 

obviate any necessity for distinguishing between social and private 
capital, but the necessity still remains for doing something with this 
property — a serious matter in itself, or of excluding it from economic 
consideration — a still more serious matter. 

^ Cf. Veblen, "Modern Business Capital," The Theory of Business 
Enterprise, chap. vi. 



154 VALUE AND DISTRIBUTION 

direction of it — technological or other — may perhaps be 
made clearer if we set ourselves to observe the different 
ways in which different entrepreneurs in the same line of 
production go about to achieve precisely similar ends. Of 
six farmers, with substantially similar farms and inheriting 
or borrowing an equal fund of purchasing power, one will 
buy more land, another more machinery, a third will hire 
more labor, a fourth will buy more draft cattle, a fifth will 
increase his herds, a sixth will enlarge or improve his sheds 
and barns; but all will, in essential similarity, be devising 
ways of most gainfully putting product upon the market. 
True, there would be room enough here, were it to the 
purpose, for technological distinctions between the various 
factors of production, but it is clearly not to the purpose; 
no one of these productive outlays is any more or any less 
a cost than any other ; and no one of them is a cost by virtue 
of its labor or its pain content, or of its abstinence quality, 
but only of its capital outlay. 

Lest the argument seem to imply too much, or its con- 
clusions to extend too far, it may be permissible again to 
repeat that no abandonment of the technological concept of 
capital is advocated or could be admitted to be desirable, 
but only that this technological concept be accepted as such, 
and that its distinctly social bearing and significance be 
recognized. Nor is any attack intended upon the principle 
that, from the social as well as from the individual point 
of view, all wealth postponed in consumption is capital. 
But it is here insistently urged that the category of private 
capital must not be abandoned, but enlarged to be as wide 
as the concept of competitive capital; and that this latter 
concept needs not only recognition, but a markedly increased 
emphasis as surpassingly important among capital concepts ; 
and all this to the end that economics may preserve some 
practical relation to the actual business life of a competitive 
entrepreneur society.^ 

* This concept of capital is substantially the same as that which, 
from another point of view and for entirely different purposes, is set 
forth by Professor Veblen in his Theory of Business Enterprise. 



CAPITAL AS A COMPETITIVE CONCEPT 155 

In certain important particulars the foregoing argument and its 
conclusions are obviously at one with the views of Professors Fetter 
and Fisher. Social capital one may be content to define in harmony 
with Professor Fetter's formulation ; but there must be sharp dissent 
from the abandotmient of the private-capital concept. Professor 
Fetter's formulation, while entirely adequate from the social point of 
view, and important for theoretical doctrines as viewed therefrom, can 
scarcely be regarded as of theoretical adequacy or of practical service 
when carried over into the field of existing facts. 

Nor does it appear possible to work out anything like approximate 
coincidence, as does Boehm-Bawerk, between social and private capital, 
private capital being held as somewhat the more inclusive concept. 
Fetter and Fisher have sufficiently shown the arbitrary and illogical 
character of this procedure. Private capital, if there is any such thing, 
is widely different from a category collateral to and supplementary to 
the social-capital concept. 

But it is not so clear whether, under Professor Fisher's reasonings, 
there may not be room for the entrepreneur-capital concept above set 
forth. Certainly the citations from ante-Smith usage, as well as from 
later usage, admit, if indeed they do not impose, the private business 
concept ; e. g. : 

161 2: "La sorte principale que e quella quantita di danari, che 
pongono i mercatanti in sui traffiche." 

1694: "Le sorte principal d'une dette." 

161 1 : "Wealth, worth: a stocke, a nian's principal or chiefe sub- 
stance." 

1730: "Capital stock [in trade, etc.] is the stock or fund of a 
trading company, or the sum of money they jointly contribute to be 
employed in trade." And so, substantially. Rider, 1759; Dyche, 1750; 
Nicholson, 181 8, 

1859 : "On donne vulgairement ce nom a toute somme amasse, et 
plus particulierement a celles qui, placees ou pretees, peuvent produire 
interet." 

1883 : "The amount of money or property subscribed or employed 
in a joint-stock association ; the money assets invested in business by 
a trading firm or individual ; the net worth of a party." 

The foregoing citations are all from among those collected by 
Professor Fisher and quoted by him in the Quarterly Journal of 
Economics, May, 1904 ; which see. 

Read with the necessary bias, also. Professor Fisher's formulation 
is wide enough to admit of the entrepreneur concept : a stock (of wealth 
or property, or the value of either) existing at an instant of time, as 
distinguished from income, which is a ■flow through a period of time. 
But inasmuch as this interpretation would make the formulation do duty 
for two entirely distinct and inconsistent concepts, it is perhaps 
not fairly to be claimed or imputed ; Professor Fisher's point of view 
and reasonings are prevailingly social in character. So Processor 
Tuttle's notion, "surplus wealth as a possession" (Quarterly Journal of 
Economics, November, 1903), appears to be an unwarrantable joinder 
of social and competitive considerations, or, perhaps better, an impos- 
sible compromise between them. 

In last analysis, however, the objections to Professor Fisher's 
view are best appreciated by following out rigorously his distinction 
between fund and flow, a distinction of unquestionably great value, 
but made overdecisive for the purposes in hand: 



156 



VALUE AND DISTRIBUTION 



Capital and income being made correlative terms, all flow being 
income, and the fund giving origin to the flow being capital, wages 
thereby become a subhead of interest, and men, or their productive 
power, become capital. Fisher himself accepts this conclusion, but 
recognizes the awkwardness of it, and declines to regard it as essential 
to his main position. But it is none the less true that giving up this 
point necessitates the abandonment of the iund-vs.-How distinction, 
at all events for the main purpose to which it is applied. 

And there is really insuperable difficulty in the way of making men 
capital, if the capital notion be taken to imply the reduction of the 
productive good to the value denominator ; and this, it will be remem- 
bered, is the view for which Professor Fisher has announced himself 
to stand: "Professor Fetter .... seems to think that I restrict the 
meaning of capital to concrete wealth rather than the value of wealth, 
and that I do not admit 'services' under income. But these are 
both prominent theses of mine" (Quarterly Journal of Economics, May, 
1904, p. 388, note). But it is, then, impossible that men become capi- 
tal, inasmuch as, while each man does give off successive productive 
services, which, so far as they are salable — and sold — in advance 
of their actual rendering, may each obtain, through the process of dis- 
count, a present worth, it is not possible to attach a present worth to 
the whole series in block, that is to the man entire ; that the difficulty 
of giving the successive doses of upkeep expression in present worth 
is not insurmountable, is seen in the fact that other productive agents, 
subjected to upkeep expenses, obtain a net present value. The diffi- 
culty is that, outside of slavery, no sale is possible, and that thereby 
there is nobody to do the capitalizing ; free men have no market value. 
Precisely as nothing is property that cannot be owned, so nothing is 
capital that cannot be capitalized ; thus no income can be computed 
as the flow from any fund, so long as the succession of incomes can- 
not be funded. 

It would, indeed, be possible, as Fisher rightly urges, for each or 
any individual man to capitalize himself upon the basis of what his 
future income was expected to offer as gratification balance over and 
above the stress and burden of acquiring the income. But even this 
does not meet the difficulty ; for if men are to be capitalized in such 
manner as to permit that the concept of flow — interest — ^be articulated 
with the concept of fund — capital — it must, upon such basis, follow 
that all income, and not some share or balance of income, be taken as the 
interest fact, and thereupon be subjected to the discount reduction 
into terms of capital. Otherwise it will immediately become necessary 
that all rents upon instrumental or other saved wealth be taken to be 
capital only to the extent that the incomes therefrom afford a net 
return over and above the burdens and protests of postponement. 

Resting upon this view of man as capital, debts and franchises 
are by Fisher included within the capital concept, as parts of the fund, 
since they are liens against men, mortgage claims, so to speak, upon the 
human-capital items. But if it be not permissible to regard men as 
capital, there is logically no place for choses in action, unless upon the 
acceptance of the private-capital concept — an outcome which both 
Fetter's and Fisher's views are especially recommended as avoiding. 



CHAPTER XII 

COMPETITIVE SAVINGS AND SOCIAL CAPITAL: LOAN 
FUND AND ABSTRACT CAPITAL 

We have seen that the cost-of-production and the value 
problem here has to do not with capital as a social concept 
but solely with competitive capital, capital as a fund for the 
payment of the expenses of production, capital conceived in 
such wise that interest payments are as correctly to be 
regarded as paid from it as for it, capital, that is to say, as 
the source of rent, insurance, tax, and advertising outlays, 
and of all other costs of production as well. 

All this follows from the truth that cost of production, 
as a category in the investigation of market values in a 
competitive society, is purely a private and competitive fact. 
Elsewhere it may be our task to elaborate categories of 
social cost, cost as it would present itself in a collectivist 
economy, cost in terms of some sort of social labor pain 
or of displacement of social product, — cost, that is 
to say, unrelated to private capital and to competitive 
outlay, and entirely exclusive of all the computations and 
the detail and the organization of private initiative for 
private gain. 

But for competitive economics, and for cost of production 
as a step in the investigation of competitive market values, 
all concepts must be competitive in character; capital must, 
for cost purposes, be taken as the fund out of which pro- 
ductive expenditures are paid, or as the valued thing or 
situation or agent into which these capital outlays have been 
incorporated and value-wise expressed. 

It follows, then, that competitive capital will comprise 
not merely machinery and tools and improvements upon 
land, but also stocks in trade, and counter money, together 
with any and all cost-obtained means and agents of private 
gain, land or other ; thus, diverging from the social concept 

157 



158 VALUE AND DISTRIBUTION 

even at its broadest, competitive capital must include such 
non-social forms of wealth as debts, franchises, trade- 
secrets, trade-marks, copyrights, good-will, influence, legis- 
lative and administrative favor. 

In sum, as has been pointed out at length, the entre- 
preneur-capital concept abandons, as purely technological 
and mechanical and as irrelevant to the computations of 
competitive production, the traditional threefold subdivision 
of productive factors; it places all productive outlays as 
upon the same footing relatively to cost and to value, and 
forsakes all attempt to make capital a subhead under the 
category of social wealth. Private capital must logically 
stand as merely another aspect of private wealth. 

But it is to be noted that there remains always one 
fundamental likeness between social capital and competitive 
capital — the test by virtue of which any good or possession 
considered from either point of view is entitled to be 
regarded as capital — the characteristic mark and the essen- 
tial fact in the capital concept, that of postponed ultimate 
service. Capital always and everywhere, be it of the social 
or of the private sort, is a case of wealth held by the owner 
thereof for the advantage accruing with time. 

Saving, then, means postponed service; always and 
everywhere postponed service is the heart of the capital 
concept. Privately postponed service is private capital; 
socially postponed service is social capital.^ 

Thus while, from the social point of view, the distinc- 
tion between capital goods and land goods might possibly 
be rested upon either technological or genetic considera- 
tions, it is clear that, from the competitive point of view, 

^ It may be objected — a critical friend has indeed objected — that 
the ideal and unmitigated miser postpones his consumption without 
purpose of later consumption, and with the distinct purpose of mere 
accumulation. This must be granted ; and it is obviously not a satis- 
factory disposal of the case to term it abnormal, or to put it aside as 
mere aberration or disease. But in reality no difficulty is presented 
for the proposition advanced, which is merely that the satisfaction 
offered by immediate consumption will not be foregone excepting upon 
terms of a larger service obtained by way of income due to earning 
power or through a continued and prolonged enjoyment of some sort. 



SOCIAL AND ABSTRACT CAPITAL iS9 

all questions of derivation and origin and all questions of 
probable or possible modifications of supply are equally 
irrelevant as bearing upon the content of the term capital. 
And likewise the distinction between production and con- 
sumption goods takes on, under the private-capital con- 
cept, quite a different aspect, if indeed it does not break 
down altogether. All forms of merchandise must rank as 
capital; rented pleasure boats serve as basis of acquisition; 
technological and non-technological goods fall equally 
within the classification; whatever commands, for the indi- 
vidual, power of disposal over present goods may be the 
subject of individual saving — of postponed service. 
Whether this disposal rests upon the ownership of con- 
crete and tangible facts or merely of some right or privilege 
or claim, is for the purposes of the individual computation 
entirely irrelevant; productivity for the individual reckon- 
ing is in any case implied by the very fact that postponement 
of service is decided upon; productivity thereby assumes a 
new aspect; and consumption goods, technological goods, 
and immaterial goods all take on, in their time aspect, the 
character of capital, as in one way or another income-bear- 
ing, increment-commanding items of ownership. 

Viewed in the light of these considerations, some of the 
confusions, both in earlier and in current capital discus- 
sion, come to be readily explicable; the distinction between 
the social and the competitive concepts has commonly been 
but vaguely felt and never consistently worked out. Capi- 
tal, in the sense of a wage-outlay fund, belongs exclusively 
to the competitive concept; capital as instrumental goods 

In ultimate analysis the miser is not indefinitely postponing his enjoy- 
ment ; instead of this, he is immediately entering upon the preferable 
alternative enjoyment, the long-time utility-income method. 

Likewise it is no part of the argument to insist that the principal 
sum of an investment must some time be consumed, but only that the 
immediate total of satisfaction offered by the present utility of wealth 
will be foregone only on the expectation of a larger total of service 
through waiting, and that this could fail to be true only upon such 
conditions as, making abstinence an indifferent thing, must make 
production a motiveless thing. 



i6o VALUE AND DISTRIBUTION 

falls equally well under either. Capital as distinguished 
from other instrumental goods — land and natural agents — is 
a possible social and technological concept ; but from the 
point of view of private capital the distinction vanishes. 
Credit rights, franchises, patents, good-will, privileges, have 
no existence in the collective reckoning; but as competitive 
facts they are among the most important of acquisitive 
goods. The wage-fund doctrine is nonsense from the point 
of view of social reasonings ; but from the private point 
of view it is an entirely tenable, though admittedly a not 
over-important or necessary, concept. Subsistence goods are 
readily enough regarded as costs and as production items, 
if only the private instead of the collective standpoint be 
adopted. 

That labor is limited by capital, taken in the sense of 
technological equipment, is, if rightly interpreted, hardly 
open to question; but the proposition means nothing or 
worse if asserted with regard to private capital. 

But, for our present purposes, the most significant of 
the conclusions resulting from this constant and chronic 
shifting in point of view is in the treatment of savings, loan 
capital, and commercial credits. Under what concept are 
we, indeed, proceeding, in our talk about fixed and circulat- 
ing capital, the great centers of capital, great capital bor- 
rowings, the growth of capital, the fluidity and mobility of 
capital? And what is really the relation between savings 
and capital? 

What, for example, is Ricardo talking of in the follow- 
ing passage, already quoted in part? 

Capital is apportioned precisely, in the requisite abundance 
and no more, to the production of the different commodities which 
happen to be in demand. With the rise or fall of prices .... 
capital is either encouraged to enter into, or is warned to depart 
from, the particular employment in which the variation has taken 
place. Whilst every man is free to employ his capital where he 
pleases, he will naturally seek for it that employment which is most 
advantageous; he will naturally be dissatisfied with a profit of lo 
per cent., if by removing his capital he can obtain a profit of 



SOCIAL AND ABSTRACT CAPITAL l6l 

15 per cent It is perhaps very difficult to trace the 

steps by which this change is effected : it is probably effected by a 
manufacturer not absolutely changing his employment, but only 
lessening the quantity of capital he has in that employment. In all 
rich countries there is a number of men forming what is called the 
monied class ; these men are engaged in no trade, but live on the 
interest of their money, which is employed in discounting bills, or 
in loans to the more industrious part of the community. The 
bankers too employ large capital on the same objects. The capital 
so employed forms a circulating capital of a large amount, and is 
employed, in larger or smaller proportions, by all the different 
trades of the country. There is perhaps no manufacturer, how- 
ever rich, who limits his business to the extent that his own funds 
will allow : he has always some portion of this floating capital, 
increasing or diminishing according to the activity of the demand 
for his commodities. When the demand for silks increases, and 
that for cloth diminishes, the clothier does not remove with his 
capital to the silk trade; but he dismisses some of his workmen, 
he discontinues his demand for loans from bankers and monied 
men ; while the case of the silk manufacturer is the reverse : he 
wishes to employ more workmen, and thus his motive for borrow- 
ing is increased; he borrows more, and thus capital is transferred 
from one employment to another, without the necessity of a manu- 
facturer discontinuing his usual occupation.^ 

Whence come these sums that Ricardo's manufacturer 
is borrowing- from the moneyed classes? It is a common- 
place that capital comes from saving; and it is unfortu- 
nately almost as much of a commonplace that savings are in 
the same sense capital. But as we have seen, saving is 
merely the postponement of the consumable services of 
private wealth ; the people who save, the people whose 
steady streams of contribution flow into the loan market, 
are ordinarily merely receivers of income, who, having held 
their expenditures below their receipts, have something to 
lend. Their decision to postpone their personal exercise of 
their rights of consumption is carried into effect, either by 
the method of holding their purchasing power in hand in 
the form of money or by transferring this power to other 
persons by some direct or indirect method of loan. The 

* Ricardo, Political Economy, Conner's edition, chap, iv, sec. 33. 



1 62 VALUE AND DISTRIBUTION 

borrower, whether for purposes of consumption or for 
purposes of production, desires to obtain disposal over this 
purchasing- power. It is only as a question of security that 
it at all matters to the lender whether consumption goods 
or raw material or machinery or land or labor be the 
purchased fact. 

Whether, as the final outcome of individual saving, the 
productive equipment of society — its technological outillage 
— will be increased, will depend upon the direction in which 
the borrowed purchasing power is applied. Private saving, 
by the very fact of non-consumption, ranks as private capi- 
tal; but the salary or other income saved and lent may 
never result in either social capital or social wealth ; socially 
considered, the case may sum up as merely one of substi- 
tuted consumption — as simply a different distribution of the 
consumable products of industry, which in no way become 
a part of the social technological equipment. 

But by far the larger part of this loan-fund form of 
savings capital is not thus easy of analysis ; it is, neverthe- 
less, essentially of the same character of postponed con- 
sumption seeking rental openings. Any owner of any form 
of private wealth may by the sale of his wealth become the 
possessor of some of this loan-fund form of capital. By 
obtaining control of some form of purchasing power, 
whether money or other, in which is expressed and embodied 
his deferred right of service, he becomes a fact of supply in 
the market for loan capital. Commpnly by deposit in a 
bank, his loan-fund capital takes the form of an assign- 
able demand right against the bank. 

It is doubtless true that the saving and the lending 
might possibly enough take place in terms of concrete 
material wealth, instead of in the form of purchasing power 
into which this wealth has been converted, were it not for 
a lack of coincidence between demand and supply similar in 
principle to that which renders barter so impracticable as a 
system of exchange. Either the saved wealth may be in 
the hands of an owner unwilling or unable to grant credit 



SOCIAL AND ABSTRACT CAPITAL 1 63 

on any terms whatever, or the credit medium offered may- 
be that of a purchaser not sufficiently well known or not 
satisfactorily approved; thus, without some credit inter- 
mediary or underwriter, the purchaser's medium of pay- 
ment fails of the requisite degree of market-ability — is not 
for the purposes of the case in hand a currency. 

It is precisely at this point that banking methods take 
on their great importance in furnishing an investment 
opportunity for savings, and become also a practical neces- 
sity for the converting of savings into a fluid and effective 
loan fund. By the discount of the customer's note at the 
bank, there is secured for him a medium of payment accept- 
able to the seller of the property; by the method of check 
transfer the seller then becomes himself a holder 
of loan- fund capital, precisely as if the sale had been 
made for actual cash, and this cash thereupon deposited in 
bank. 

For the purpose of making all this clear and of rein- 
forcing the truth that the existence and the volume of 
private-savings capital have no necessary connection with 
the uses to which the borrower devotes the borrowed funds, 
and no necessary connection with the total volume of 
existing social wealth, the following illustration will be of 
service : 

Let there be assumed an isolated community of one 
thousand farmers, nine hundred and ninety-nine of whom 
possess each one thousand dollars of concrete wealth in 
farms and implements, at the same time that the thousandth 
man has for sale $999,000 worth of cattle. If now the capi- 
tal be sought wherewith to finance the building of a rail- 
road, the project must fail; it is true that there is one 
wealthy man in the community, a m*an who would gladly, 
on approved security, lend $999,000 worth — of cattle. 
But railroad construction cannot be financed on this basis, 
unless, indeed, to the extent that the cattle can be made to 
serve as a form of currency. The difficulty is not that there 



164 VALUE AND DISTRIBUTION 

is a lack of wealth in the community, but that this wealth is 
not in practicably lendable form. 

But if now these cattle can be sold out on credit among 
these nine hundred and ninety-nine farmers, their notes 
taken and discounted into deposit credits; or even if against 
these farmers there are taken contracts or due-bills or 
acceptances or orders dischargeable on demand in labor or 
in produce, there will forthwith exist in this society $999,- 
000 of loan-fund capital of a character suited to the needs 
of the enterprise in hand. 

And if it be objected that this really amounts to the 
same thing as lending the cattle, only that the method is 
roundabout and less simple, all this must be admitted, but 
with the important modification that the other way is, for 
the purpose of capital-borrowing, an impracticable or even 
an impossible method; debts must exist, that is, collectible 
rights in money or in other forms of wealth — for money is 
for many purposes only a form of credit — must exist, 
before these credit rights can be lent; and nothing else can 
practicably be lent. 

And there is this still more important modification also : 
suppose all these cattle to have been, immediately after the 
sale, swept away by disease; if the debtors are still solvent, 
the loss is theirs and not that of the capitalist ; they are in the 
aggregate $999,000 poorer, but he is as well off as before, 
and has not a jot less "capital" to lend. That is to say, the 
volume of loan fund in a society has no direct or necessary 
relation — still less, proportion — to the wealth of the society 
in question. It is true that if these farmers had nothing left 
to pay with, the debts might be uncollectible and thereby 
fall out of the lists of capital ; but so also might they not, 
if only it were still true that the laws of the society or its 
business code of morality made the debts collectible in 
terms either of commodities or of services. A debt 
that is secured by character is as good an investment and as 
truly capital as any other debt, if only it be really 
as secure. 



SOCIAL AND ABSTRACT CAPITAL 165 

But this is not the whole doctrine ; from the theory and 
the methods of discount banking, we are to make some 
further deductions. It is worth noting that Bagehot, in 
adopting to the full the Ricardian mix-up of the social- 
with the private-capital concept, declares that capital 
includes "two unlike sorts of commodities, co-operative 
things which help labor, and remunerative things which 
pay for it ;" ^ and further still — in full conformity with 
Ricardo — remarks : 

Suppose the corn trade to become particularly good, there 
are immediately twice the usual number of corn bills in the bill 
brokers' cases ; and if of the iron trades, then of iron bills. You 
could almost see the change of capital if you could look into the 
bill cases at different times.* 

But note that Bagehot does not make it altogether clear 
whose is the capital that is changing; but it is perhaps 
fairly to be assumed that he takes it to be the capital of the 
lenders. 

Cairnes's statement upon this point is hardly more satis- 
factory; but the loan- fund variety of capital receives 
equally distinct recognition : 

The existence of a large amount of capital in commercial coun- 
tries in disposable form, or, to speak less equivocally, -in the form 
of money or other purchasing power, capable of being turned to 
any purpose required, is a patent and undeniable fact. Nor is it 
less certain that this capital is constantly seeking the best invest- 
ments, and rapidly moves towards any branch of industry that 
happens at the moment to offer special attractions." 

^ Economic Studies, 2d ed., p. 55. 

* Bagehot, op. cit., p. 45. 

^ Cairnes, Leading Principles, p. 63. 

"Everyone is aware that England has much more immediately dis- 
posable and ready cash than any other country. But very few persons 
are aware how much greater the ready balance — the floating loan fund, 
which can be lent to anyone for any purpose — is in England than it is 
anywhere else in the world. A very few figures will show how large 
the London loan fund is, and how much greater it is than any other. 
The known deposits — the deposits of banks which publish their accounts 
— are: in London (December 31, 1872), £120,000,000; in Paris 
(February 27, 1873), £13,000,000; in New York (February, 1873), 
£40,000,000; in German Empire (January 31, 1873), £8,000,000 ; and 
the unknown deposits — deposits in banks which do not publish their 



1 66 VALUE AND DISTRIBUTION 

But the interesting question still remains whether, when 
the business man has borrowed from a deposit creditor of 
a bank a share in this loan fund, this borrowed 
portion becomes a part of the business man's bor- 
rowed capital and constitutes an addition thereto. 
Does the creation of new capital take place with 
the coming into existence of a new promise to 
pay? It must be agreed that the new loan has worked no 
deduction from the capital of the lender; he now holds a 
note or a right as valuable as was the thing or right with 
which he parted. But has there been here a new creation of 
capital, merely by the fact of a larger volume of cash 
purchasing power ? The borrower has by assignment come 
to hold a demand right against the bank — a right obtained 
on terms of creating against himself an offsetting and 
equivalent demand ; he has enlarged his cash bills receivable 
on terms of increasing his time bills payable. If the note 
signed is a liability, this deposit credit appears to rank 
for him as a new property acquired to correspond; it is as 
much an asset as will be any addition to his stock of 
merchandise purchased through the intermediary of this 
borrowed deposit credit. In the language of the business 
world, he has "borrowed capital" for use in his business ; 
the business now employs so much the larger capital total. 
And yet if this deposit right is really capital, there is 
necromancy somewhere; the lender also has not diminished 
his capital holdings, but has simply exchanged debtors. 

Something like a similar question arises where a bank 
customer has had discounted his own note with the bank; 
has he borrowed a share out of the existing loan fund? If 
not, is whatever he has borrowed properly to be reckoned 

accounts — are in London much greater than those in any other of 
these cities. The bankers' deposits of London are many times greater 
than those of any other country." — Bagehot, Lombard Street, chap, i, 
p. 4- 

A well-informed estimate in 1895 placed the bank deposits of 
Great Britain at £700,000,000. In the United States at present the 
deposit liabilities of the national banks alone run upwards of four and 
one-half billions of dollars. 



SOCIAL AND ABSTRACT CAPITAL 167 

capital? Has he increased his capital investment? or his 
capital utilized in his business? What has really taken 
place ? 

Much confusion may be avoided by getting firm grasp 
of the truth that a bank characteristically does not — prac- 
ticably speaking, cannot — lend its deposits. Not that the 
money deposited might not be lent, instead of, as is the 
more common case, being retained as part of the cash 
resources of the bank. But even so much as this can be 
true only where the deposit is in the form of actual money. 
Conceiving of the bank system as an aggregate, deposits 
come mostly to be regarded as mere transfers of credit 
from one branch to another; the clearing system is an 
effective demonstration of this. In any case, however, 
deposits in the sense of demandable rights, as distinguished 
from the thing deposited — customers' accounts, the 
things which total for so large a part in the aggregate bank- 
ing liability — are made up of something not within the 
disposal of the bank to lend, but solely within the disposal 
of the depositing customer. Commonly, indeed, the 
deposit liability running against the bank is the outcome of 
banking accommodations already given; by just so much 
it is a diminution from the accommodations remaining 
possible. The lending power derivative from the accom- 
modations already granted is that of the deposit customers. 
But in any case, from whatever source the deposit liability 
arises, not it — not the liability, but the deposited money, 
if there be any, is the only thing lendable by the bank, 
or usable as reserve basis for further lending. And com- 
monly, as we have seen, no money is deposited, but only 
an item of account against some other bank — a right of 
defense against other claims upon which the other bank, 
debtor in the case in hand, is creditor. 

The rationale of borrowing from a bank is, as is 
familiarly known, quite other than the borrowing of money. 
True enough, money may be borrowed, but this is unusual 
and incidental — or accidental — and, so far as it occurs, is 



1 68 VALUE AND DISTRIBUTION 

precisely similar to non-bank borrowing; it is no part of 
that which .is peculiar to banking methods and pertinent to 
banking theory. The transaction of discount and deposit 
is typically not a lending of cash ; it is commonly described 
as a lending by the bank of its credit, either in the guise of 
deposit credit, or of bank bills. In exchange for this 
demand right the customer gives his note which, whether in 
form a demand or a time obligation, is, in fact, more or 
less pronouncedly, a time relation. The case has the 
appearance of a mere interchange of obligations, the cus- 
tomer passing over one which is not generally acceptable as 
current purchasing power, and receiving one which is so 
current. 

Making no question of the correctness of this view so 
far as it goes, it is nevertheless to be said that, despite all 
the machinery and the terminology of the case to the con- 
trary, all that the bank really does is to underwrite the 
credit of the customer; it lends its own credit, truly, but 
only in the sense of adding its guarantee to the customer's 
undertaking to pay. 

It therefore follows that the naive business view of 
"bank capital" obtained through borrowing misconceives 
the facts ; the process is merely writing over into acceptable 
purchasing power the business man's own note. The result 
may obviously be to place the business man in the posses- 
sion of goods obtained on this underwritten credit; and for 
present purposes it possibly does not greatly matter whether 
the man's personal credit is itself called the capital, or 
whether the pass-book claim, or the demand note against 
the bank, be regarded as the capital, or whether finally the 
goods obtained through the expenditure of the purchasing 
power be regarded as the capital. It remains true that in 
any case the business man's total investment, in the sense 
of his net "worth," is not increased. 

But whatever the terminology for all this may be and 
however unclear the merits of the case as matter of termi- 
nology, this much comes to stand forth clearly: whatever 



SOCIAL AND ABSTRACT CAPITAL 169 

else has or has not been increased by the process of dis- 
counting a note, the supply of loan funds, the media for the 
making of exchanges or for the financing of enterprises, the 
borrowable and lendable and usable current purchasing 
power of the community, has been increased. The creation 
and issue of current purchasing power is the chief business 
of banking institutions. Loan funds — it begins to look as 
if for some share of these the term capital is of doubtful 
propriety — are even more intangible and incorporeal than 
savings capital, since not all of the loan fund has even as 
much as a previous saving behind it; but such as they are, 
bank-made loan funds must be recognized as intangible and 
incorporeal facts, a sheer matter of intricacy and com- 
plexity in business relations — meshes of obligation — a mere 
scaffolding of promises — a folding back one upon another 
of successive layers of credit. And because not necessarily 
representative of an increase of social capital or even of the 
liquidated total of private capital, it seems necessary to 
recognize the loan fund as a distinct economic category. 

Some important conclusions now require attention as 
to the nature of much of what is called circulating capital, 
and as to the qualities of mobility and fluidity said to be 
especially characteristic of capital as against land or labor, 
and finally also as to the interpretation and the limitations 
to be imposed upon the doctrine of abstract capital and of 
capital as an abstract fund. 

From the social point of view all technological goods and 
indeed all social wealth have, in varying degrees, the quality 
of fixedness. But from the private point of view all capital 
is mobile, since all wealth facts are salable, and since all 
wealth is capital in the measure and degree of its market 
price. From the private point of view, therefore, every 
possession, whether commodity or right, may be the subject 
of abstinence,^ and this without reference to the degree of 

' See note on Senior, p. 137. 



1 70 VALUE AND DISTRIBUTION 

its fixedness, when regarded from the point of view of its 
technological adaptation, or of its quality as a consumption 
good. Complete mobility for private purposes is, how- 
ever, achieved only by the transformation of the vendible 
item of private wealth into the form of money or of other 
current disposable purchasing power — that is to say, into 
the very commercial material or medium of which the loan 
fund is composed^ 

It should now be possible to estimate how great is the 
promise of service and how serious the admixture of error 
presented by the abstract-capital concept. 

Looked at from the social point of view, there is no such 

^ Approached in this wise, the differences between Smith and 
Senior, on the one side, and Ricardo and James Mill upon the other, 
with regard to the nature and characteristics of circulating and of 
fixed capital, are seen to be merely differences in the choice of point 
of view. And here, as commonly, when Smith and Ricardo were 
clearly and definitely at issue. Smith had the right of the controversy. 
Smith was advocating the private-competitive point of view, while 
Ricardo's line of distinction was prevailingly technological. 

According to Smith, "Capital employed .... in such .... 
things as yield a revenue of profit without changing masters or circu- 
lating any farther .... may properly be called fixed capital 

Circulating capital .... is constantly going .... in one shape 
and returning .... in another, and it is only by means of such 
circulation, or successive exchanges, that it can yield .... any 

profit Circulating capital is composed of four parts 

First, of the money by means of which all the other three are circu- 
lated and distributed ; .... of the stocks of provisions in the 
possession of the butcher, the grazier, etc. ; .... of the materials 
whether altogether rude or more or less manufactured ; .... of 
the work .... made up and completed but still in the hands 
of ... . the manufacturer." — Wealth of Nations, Book II, chap. i. 

So, with Smith, a tailor's needles are fixed capital no matter how 
short-lived of service. The question is how the wealth is actually 
handled under the guidance of private interests with reference to the 
marketing of it — a matter of change of ownership. 

With Ricardo the question is one of mechanical and technological 
durability: "According as capital is rapidly perishable, and requires to 
be frequently produced, or is of slow consumption, it is classed under 
the heads of circulating or of fixed capital." — Political Economy, 
chap, i, sec. 4. 

Senior sides with Smith : "Mr. Ricardo might well remark that 
the line of demarcation between the two sorts of capital cannot be 
accurately drawn ; for what can be more vague or more void of posi- 
tive meaning than such comparative terms as slow and rapid ? The 
singular circumstance is that both he and Mr. [James] Mill should 



SOCIAL AND ABSTRACT CAPITAL 171 

thing as abstract capital in any other sense than that 
according to which all social wealth is subject to the value 
measure and is wealth or capital under this test and measure 
and expression. And neither from the social nor from any- 
other point of view is there any "spiritual essence" of 
value hovering over the material forms of capital ; nor from 
the social point of view, or of necessity from the private 
point of view, is it true that material things perish or wear 
out, while the capital ghost of them is immortal; there is, in 
fine, no capital entity as distinct from the capital goods 
themselves, though there is such a thing as the sum of the 
values of existing capital goods. This value or price aspect 
of the goods is to be regarded as the attribute or character- 
have supposed .... that their division followed that of Adam Smith, 
It is obviously a cross distinction." — Senior, Political Economy, 2d ed., 
pp. 62-73. 

John Stuart Mill's use of the two terms hopelessly confuses tech- 
nological and competitive considerations : "Of the capital engaged in 
the production of any commodity, there is a part which, having been 
once used, exists no longer as capital ; is no longer capable of rendering 
service to production, or at least not the same service nor to the same 

sort of production [a technological distinction] In the same 

division must be placed the portion of capital which is paid as the 
wages, or consumed as the subsistence of laborers. That part of the 
capital of the cotton-spinner which he pays away to his work-people, 
once so paid, exists no longer as his capital, or as a cotton-spinner's 
capital. [Italics the present writer's. The money never had any 
technological quality ; the reasoning is purely competitive, bearing on 
private — entrepreneur — costs.] Such portion of it as the workmen 
consume [money?] no longer exists as capital at all ; . . . . capital 
which in this manner fulfils the whole of its office in the production in 
which it is engaged, by a single tise [technological aspect and private 

aspect mixed and confused] is called circulating capital This 

portion of capital requires to be constantly renewed by the sale of the 
finished product, and when renewed is perpetually parted with in buying 
materials and paying wages ; so that it does its work, not by being kept 
but by changing hands. [Mixed concept ; rests in part upon considera- 
tions of durability, in part, of changes of ownership.] Another large 
portion of capital consists of instruments of production, of a more or 
less permanent character, which produce their effect not by being parted 
with but by being kept, and the efficiency of which is not exhausted by 
a single use." [Mixed concept ; rests in part on durability, in part on 
non-change of ownership.] — Mill, Principles, Book I, chap, vi, sec. i. 

For proof that this same confusion between the social-technological 
and the private-acquisitive point of view is equally characteristic of 
late and current discussion, reference may be had to an article by the 
present writer published in the Yale Review for November, 1905, entitled 
"Doctrinal Tendencies — Fetter, Flux, Seager, Carver." 



172 VALUE AND DISTRIBUTION 

istic by which and according to which the g-oods possess the 
capital quaHty.^ 

But from the point of view of private competition and 
competitive business, the only point of view, be it repeated, 
which greatly concerns economic theory in general or 
which at all concerns the cost and value investigation, the 
question takes on a different aspect; here all capital, by 
virtue of its quality of vendibility is, in a sense, unspecial- 
ized, mobile, and fluid; and all stocks of materials and all 
intermediate products are, as such, mobile in their varying 

® From this social point of view, therefore, Professor Carver's 
analysis of the abstract-capital concept leaves nothing to be said : 
"The effort to distinguish between capital and capital-goods seems to 
be simply an attempt to distinguish between a quantitative measurement 
for capital and the capital itself. Things are measured, of course, by 
selecting a single property which they possess in common, such as 
number, extension, or specific gravity, and comparing them on the basis 
of this property. When we want to say how much there is of a certain 
thing, we express it in terms of the property according to which it is 
commonly measured. This is true of wealth and capital as of other 
things. The primitive herdsman, if asked the amount of his wealth, 
would doubtless have answered an hundred or two hundred head, as the 
case might be. The primitive agriculturalist, whose wealth consisted 
of wheat, might have answered in terms of cubic contents, as so many 
bushels. It is conceivable, though improbable, that both might have 
united upon specific gravity as the basis of measurement, and have 
answered in pounds. But the change to specific gravity as the basis 
of measurement and quantitative expression, would not have changed 
one bit the nature of their wealth or their capital. Nor would it have 
made either clearer or less clear the distinction between capital and 
capital-goods. 

"As a matter of fact, value, being the one property common to all 
forms of wealth, has long since been selected as the property accord- 
ing to which all wealth is to be measured, and in terms of which 
quantities of wealth are always to be expressed. When asked how 
much wealth they have, men will reply, so many dollars, just as the 
herdsman would have enumerated his animals. Capital, being a form 
of wealth, is measured, and its quantity is expressed, in precisely the 
same way. Does this change in the basis of measurement change in the 
slightest degree the nature of capital ? By no means. When asked how 
much capital they have, men will express it in dollars : but, if asked in 
what their capital consists, they will enumerate the instruments. The 
instruments are the capital, and the amount of value in them is not the 

capital Every distinction which Professor Clark has made 

between capital and capital-goods can be made with equal clearness and 
with equal justice between the herdsman's hundred head and the 
animals composing it, between the farmer's bushels and the wheat which 
they contain, or between the pounds of wealth on the one hand, and the 
animals and wheat on the other." — Quarterly Journal of Economics, 
Vol. XV ([August, 1901), p. 589. 



SOCIAL AND ABSTRACT CAPITAL I73 

degrees; and even so-called fixed capitals, technological 
instrumental goods, are mobile in more or less retarded 
movement, accordingly as there is or is not a ready market 
for them.^ 

It is not, however, true that abstract capital at all coin- 
cides in volume with the price expression of the aggregate 
of social capital or of social wealth ; the characteristics of 
abstractness, of homogeneity, of an entire fluidity and 
mobility, belong to what we have described as the loan 
fund, and to it solely. Nor is the size of this fund com- 
mensurate with the existing fund or total of private capital ; 
the loan fund is merely a portion or subdivision of private 
capital. Nor, as we have seen, is the loan fund made up 
of claims resting for their collectibility solely upon some 
existing form of social wealth or capital; purely personal 
claims, if they are enforceable, are as truly capital as are 
rights secured by collateral or by mortgage ; many debtors 
put in pledge their future earning power, precisely as may a 
state its future revenues. So, also, precisely as the present 
value of a city corner is the discounted value of the trade 
privileges which it will in the long future control, so the 
good-will of a business, and the market value of that good- 

* The private reckoning being solely concerned with the price aspect 
of the case, there is, from this point of view, in the abstract-capital 
doctrine, a residuum of truth not quite adequately recognized in Pro- 
fessor Carver's analysis as it continues : "As to the permanence of 
capital. Does capital abide while capital-goods perish, or is it only the 
quantitative expression for capital which remains, while capital, the 
thing measured, perishes? Evidently, the latter. Though animals 
perish, the amount of the herdsman's wealth, measured numerically and 
expressed, for example, as an hundred head, may remain. Is it the 
same wealth ? Not unless it is the same hundred head. Though wheat 
perishes, the amount of the farmer's wealth, measured in cubic contents 
and expressed, for example, as a thousand bushels, may remain. Is 
it the same wealth ? Not unless it is the same thousand bushels. 
Though animals and wheat perish, the wealth of both farmer and herds- 
man, measured on the basis of specific gravity and expressed, for 
example, as ten thousand pounds, may remain. Is it the same 
wealth? Not unless it is the same ten thousand pounds. Though goods 
of all kinds perish, the amount of wealth, measured on the basis of 
value and expressed in dollars, may remain. Again, is it the same 
wealth? The things measured, whose quality is expressed in dollars, 
are evidently not the same ; and it is only by confusing the measure for 
the thing measured that it can be said to be the same wealth." 



174 VALUE AND DISTRIBUTION 

will, may rest, in large part, on the prospect of business 
relations some day to be established with human beings not 
yet born; the situation is none the less a present asset in 
private capital. The essential and important kernel of truth 
in the abstract-capital concept is, then, the obscure recogni- 
tion of the loan- fund fact. Abstract capital is a subhead 
under the private-capital concept, a competitive and not a 
social fact, a share and only a share, out of the private- 
capital aggregate.^'^ 

^" That for theoretical as well as for practical purposes there is 
something at issue here will be evident from the following quotation 
from an address by Professor Joseph French Johnson, delivered before 
the Pennsylvania Bankers' Association during the year 1905 : 

"The rate of interest in the last analysis has no relation what- 
ever to the quantity of gold in the country. It is the product of the 
demand for and the supply of capital. This word capital is used by 
the economists to mean all those forms of wealth which are used in 
production of more wealth ; such for example, as machinery and raw 
materials. It includes all those goods which are not consumed directly, 
but which are used to produce things which people desire. Among 
business men and bankers the word has a different meaning. It 
denotes a loanable fund for use in business, and consists in money and 
credit in various forms. It is important for us to see that the business 
men and the economists both have in mind the same thing when they 
use the word capital. The loanable funds in the possession of banks 
are all derived from the loanable capital in the country. When the 
amount of loanable capital increases, the amount of loanable funds 
increases in a corresponding degree ; and there can be no increases of 
loanable funds brought about in any other way. Banks create nothing. 
All their lending power is the product of industry. Every deposit of 
money or credit in a bank represents actual wealth or capital that has 
been saved in a community. The loanable capital and the loanable 
funds in a country are practically the same thing ; the one a hetero- 
geneous mass of value in the form of various goods ; the other the 
same mass of value made homogeneous by the universal solvent, 
money." 



CHAPTER XIII 
THE STANDARD OF DEFERRED PAYMENTS 

The purpose of the isolated producer is the production 
of utility. Precisely the same statement holds, in a com- 
petitive society, for the producer under specialization of 
employments; but all these utility ends are, in this case, 
worked out through the intermediary of market- value 
adjustments; from the point of view of the final trade — the 
consumer's point of view — not valuable things but useful 
things are of ultimate importance; gain in utility is the sole 
motive. What one pays less for a thing than he would, if 
necessary, have paid, — what the thing is good for more than 
it has cost, the quasi-rent of purchase, — while statable in 
money, must yet finally resolve itself into goods obtainable 
through money. Likewise the cost outlay is to the producer 
ultimately a utility or disutility magnitude rather than a 
value magnitude. Producers at the margin, like traders 
at the margin, are such by the fact that the utility in prospect 
and the utility sacrificed are at balance, — are at a ratio, one to 
the other, of unit value, — and all this irrespective of how 
greatly, for the different marginal traders respectively, the 
absolute magnitudes of the balancing services and sacrifices 
may diverge — irrespective, that is to say, of whether the 
marginal case present a ratio of 5 to 5, or of 2 to 2, or of 
Yz \-0 Yz, provided all the while, of course, that even this 
much of comparability may be assumed between the feeling 
magnitudes of different men. (See page 300.) 

In view of this obvious fact that exchange is ultimately, 
in individual motive, a problem of comparison between 
alternatives of utility, that, for either trader in an exchange, 
the case can have no other significance than this of utility, 
and that market values are mere price relations — exchange 
relations — between things of service, that is, between goods 

17s 



176 VALUE AND DISTRIBUTION 

subjectively viewed, — the invitation is strong, the temptation 
great, the promise alluring, for the resolution of market 
values into a common denominator of utility, and thereby 
for somehow inferring a determination of value by utility 
as expressed in terms of this common denominator. 

But the attempt is foredoomed to failure. It is one 
thing to assert, with Say, that utility — desire, want, need — is 
the basis, through individual bidding, of the whole value 
phenomenon — the cause, the motive, and the explanation of 
price offer ; but it is quite another and a different thing to 
assert, as sometimes Say appears almost to do, that all 
market values can be resolved into this general, homogene- 
ous, underlying utility jelly, or utility denominator. The 
impossibility of all this was clear enough to Ricardo, though 
it was not clear just why. He says in a letter to Malthus : 

He ,[Say] certainly has not a correct notion of what is meant 
by value when he contends that a commodity is valuable in propor- 
tion to its utility. This would be true if buyers only regulated the 
price of commodities.^ 

But inasmuch as, in Ricardo's view, producers and not 
buyers regulate price, Ricardo inclines to make value pro- 
portional to labor — in the sense of labor pain — failing to see 
that neither utility for different consumers, nor labor for 
different producers, can be made homogeneous volumes. 
But notice once again that Ricardo does not assert the 
determination of the value of the product by the value of 
the labor, or even that there is any primary value in labor ; 
he merely asserts the proportionality of value to labor 
content : 

Our differences are becoming rather verbal than substantial. 
Your chapter on value has, in my opinion, gained considerably. 
You misrepresent me, however, on that subject when you say I 
consider the value of labor to determine the value of commodities. 
I hold, on the contrary, that it is not the value, but tlie comparative 
quantity of labor necessary to production which regulates the rela- 
tive value of the commodities produced." 

^Letters of David Ricardo to Thomas Robert Malthus, 1810, 
1828, James Bonar, Oxford, 1887, p, 173. 

^Ricardo to Say, November 9, 1819, p. 165. 



THE STANDARD OF DEFERRED PAYMENTS 177 

Whether Say also may not in some passages be reason- 
ably interpreted to assert more than the mere proportion- 
ality of value to utility, and to have attempted to give to 
value a measurement in some sort of homogeneous utility 
medium, may not be clear; but he, in terms, asserts only 
the measurement of utility by value. Thus on December 
2, 1815, he writes to Ricardo: 

You accuse me of saying that utility is the measure of value. 
I thought I had always said that the value that men attach to a 
thing is the measure of the utility that they find in it. 

And on July 19, 1821, with regard to the use of labor 
as a measure of value, a measure which^ as we have seen, 
Ricardo had, with some misgiving, adopted, as the best 
at hand, but yet not altogether adequate, Say writes: 

There are multitudes of different qualities of labor; the quan- 
tity of each of these qualities cannot be measured. I measure the 
utility incorporated in the product by the different quantities of 
another product which one would pay. 

But this seems to measure the utility of one thing by the 
utility of another, or, what is worse yet, by the mere quantity 
of another, which quantity is but a mere restatement of the 
sheer market fact of the relation. And Say explains the 
difficulty that, with gold and iron equal in utility, or even 
with iron the more useful, volume for volume, the iron has 
only 1/2000 part of the value of gold, — by saying that 
1999/2000 of the iron utility is free goods, a gratuity of 
nature. 

None of this helps much. But it seems fair to say that 
if value and labor are somehow always in proportion, it 
must follow, as Ricardo held, that labor may measure value, 
as it may equally well follow that value may measure 
labor, and all this irrespective of whether the labor has any 
primary and non-derivative value of its own; if not, the 
proposition may be correctly held ; it simply awaits expla- 
nation of its mystery. Ricardo left the proposition substan- 
tially a mystery.^ 

^ And the socialists mostly accept it as such, and leave it there : 
"Whenever by an act of exchange we equate as values our different 
products, by that very act we also equate, as human labor, the different 
kinds of labor we expended upon them. We are not aware of this ; 
nevertheless we do it. Value, therefore, does not stalk about with a 
label describing what it is. It is value, rather, that converts every 



178 VALUE AND DISTRIBUTION 

Likewise, if value — or price — by virtue of the fact that 
it is the effect of utiHty, may measure utility, the doctrine 
ought to work the other way about. 

But in point of fact, as should be already clear, neither 
the labor measure or the utility measure, on the one hand, 
nor the value measure of utility or of labor, on the other 
hand, will work, in any other sense than that both labor 
and goods get, visibly, constantly, obtrusively, a price 
rendering in the market. Laborers differ in all possible 
shades of feeling toward labor ; labor differs in all possible 
grades and directions of effectiveness ; the only homogeneity 
is the homogeneity of market value in terms of price. And 
as widely as men differ in their attitude toward productive 
effort they differ also in their attitude toward the products 

product into a social hieroglyphic. Later on we try to decipher the 
hieroglyphic, to get behind the secret of our own social products ; for 
to stamp an object of utility as a value is just as much a social product 
as language. The recent scientific discovery that the products of labor, 
so far as they are values, are but expressions of the human labor spent 
in their production, .... by no means dissipates the mist through 
which the social character of the labor appears to us to be an objective 
character of the products themselves." — Carl Marx, Das Capital 
(Moore and Aveling trans.), Humboldt Publishing Co., New York, 
p. 28. 

"It is not money that renders commodities commensurable 

It is because all commodities, as values, are realized human labor, and 
therefore commensurable, that their values can be measured by one and 
the same special commodity, and the latter be converted into the com- 
mon measure of their values." — Ibid., p. 41. 

"There is, of course, in present conditions, no possible means of 
arriving at a definite, concrete labor coin, so to say, which shall 
establish the value of commodities when and as they are produced. 
The individual labor time it may take to produce a commodity is, as we 
have seen, no test whatever of the length of social time necessary to 
produce the same commodity. 

"Nevertheless social labor time does measure the value of com- 
modities with reference relatively to one another. How is this done? 

"Take the case of weight. What is weight? To say 

that it is ponderosity doesn't help us a bit. Yet we know well enough 
what weight is by itself. Moreover, we weigh things relatively to 

their weight in other things But what the unit of weight is in 

the abstract we can no more tell than before we weighed the wheat. 

"In chemistry likewise, .... what was the Daltonic atom? 
Nobody knew and nobody knows What is a volume in chem- 
istry? It is just as impossible to say as what is an atom. None the 
less, though we do not know what they are — any more than we can 
express in figures 1/ — i — volumes serve the purpose of a common 
measure of the most diverse chemical compounds. So it is with simple, 
abstract, social human labor." — H. M. Hyndman, The Economics of 
Socialism, London, 1896, pp. 51-53. 



THE STANDARD OF DEFERRED PAYMENTS 179 

of labor ; the only homogeneity is that expressed in the price 
offer. The only utility relation possibly to be expressed by 
market price is that, for some marginal man or men, com- 
peting utilities, of unstable and unknown magnitude, are 
at balance. 

But what has all this to say for the standard of deferred 
payments? If utilities cannot be reduced to homogeneity, 
on any basis but that of price — the opaque market fact — it 
would seem to follow that the problem of deferred pay- 
ments must be worked out in terms of value rather than in 
terms of utility. And especially would this appear to be 
true, in view of the fact that equal market values are inca- 
pable of expressing any equality of utility in terms of abso- 
lute subjective magnitude, but only in equivalence of 
control over those external objective goods which are the 
bearers of utility. 

But on the other hand what shall be done with the fact 
that, carried over into individual interests, values have no 
meaning but in terms of utility ? And after all, value being 
a ratio of exchange, what does it mean to say that one 
thing at one time has the same value as another thing at 
another time? What, indeed, would it mean to say that a 
certain thing at one time has the same value as the same 
thing at another time ? Or finally what does it mean to say 
that two things at any given time have the same value? 

Value can be expressed only objectively, in terms 
of something which is, for the time being, taken as the 
medium or standard of expression. Thus, to say that two 
things have today the same value might mean very differ- 
ent things accordingly ( i ) as different men in different bar- 
gains should variously choose some one or other particular 
commodity as standard for the occasion; or (2) as a 
certain group or congeries of objective goods should some- 
how — more or less arbitrarily — come to be chosen as a 
composite standard; or (3) as equivalence should be sought 
through the intermediary of some conventionally adopted 
depository of unspecialized purchasing power, a money 



i8o VALUE AND DISTRIBUTION 

standard. It is this last case which actually is meant by 
equivalence in value in practical affairs; and if, instead of 
this, a group of commodities were chosen, the group 
would most reasonably be selected as made up of those com- 
modities into which, for the broad general average of 
consumers, unspecialized purchasing power gets expended. 

The possibility first mentioned is outside the pale of 
consideration and the second case is a subhead under the 
first, though somewhat modified to include provision against 
the probable instability attending any particular commodity 
as standard, where intervals of time intervene. The 
necessity of providing for this case of time interval is, be 
it remembered, the problem of the deferred-payment stand- 
ard. 

But possible instability in what? And here we are 
back at our original question : In value ? But this is 
meaningless, unless translated into command over useful 
things — goods. And what goods? There is no an?wer 
but to choose some group or complex of goods selected in 
such fashion as to represent a sort of average budget. 
That a of today equate in value against x of next year must 
require that a hold today to every other good the same 
exchange relations that x will hold next year. 

And so, to say that two different things at one and the 
same time have the same value is merely to assert their 
actual equality in exchange power as referred to some 
selected commodity or complex of commodities — a price 
statement possible only by the temporary or conventional 
adoption of a standard. And to assert that a certain thing, 
at one time, has the same value as the same thing at another 
time, must mean an unchanged control over the same con- 
geries or budget of goods, — practically the same control over 
some standard of payment, some medium assumed as main- 
taining — or selected as nearest approximating — an un- 
changed relation toward such a budget-complex. The 
same solution would have to be given to the problem of 
how to compare in value one thing at one time with another 



THE STANDARD OF DEFERRED PAYMENTS i8i 

thing at a later time. Equality in price over intervals of 
time is then intelligible and possible ; but equality in value — 
as distinguished from price — between two commodities 
would require that one at one time hold precisely the same 
exchange relation to every other good as that of the other 
at the other time.* 

* It is worthy of note that in exchange relations between goods 
of the same time, as distinguished from cases of deferred settlement, 
it has been urged (for example, by most of the socialists, the Marxians 
especially) that the price of any commodity expresses that the value 
of it is as much as is the value of a certain quantity of the standard ; 
the value of the standard and not the standard itself is thus held to be 
the essential fact in money, or at all events, the essential fact of its 
money function. And surely the standard itself cannot, in any other 
sense than that of its value quantity, be held adapted to serve as a 
measure of value. How much money shall be paid for a commodity 
depends, of course, in part upon the value of the commodity, but in 
part also upon the value of the money. 

The better doctrine appears, however, to be that of Laughlin 
(Principles of Money, pp. 14-16) : "A standard .... is not, and 

cannot be, synonymous with a measure of value This is not 

what we get by the use of a standard The exchange value of 

gold varies with the number and kind of things priced in it. By pri- 
cing an article in gold, the value of that article in relation to other 
commodities is not thereby 'measured' by gold. In such a case, gold 
serves only as common denominator, and not as 'a measure of value,' 
because it does not thereby state the relationship of exchange which 
that article bears to all other exchangeable goods. All that is obtained 
is the exchange ratio between gold and that particular commod- 
ity Moreover, there could, of course, be no absolute standard 

for 'measuring' value, since any one article, chosen as standard, would 
itself vary in value ; consequently the values of other goods would be 
compared with a standard itself constantly varying. Not infrequently 
one hears of an argument in favor of gold as a standard that it is as 
'invariable as a yardstick,' This statement contains the fallacy of sup- 
posing that exchange value is as absolute as linear length, when it is 
only a relation of one article to another expressed quantitatively." (But 
see, contra. Carver, Quarterly Journal of Economics, May, 1907.) 

But however all this may be, it is evident that in deferred-payment 
relations, merely a given amount of money is stipulated ; the amount 
of value actually to be received cannot be stipulated, but must neces- 
sarily depend upon the amount of value which, at the time of payment, 
may happen to be contained in the amount of money paid. The 
measure function of money is clearly not here ; a future unknown 
value cannot be a value expression of the value of other things. 

But whether, if at all, in current exchanges, and if so in what 
sense, money may be regarded as a measure of value is a problem of 
far greater perplexity. 

It has mostly gone by common acceptance that in order that goods 
exchange against each other they must be possessed of some common 
quality by virtue of which they may be related to each other for the 



1 82 VALUE AND DISTRIBUTION 

But after all, why bother, even for theoretical purposes, 
with this budget matter? If the standard requires either 
justification or rectification by the test of the budget, what 
shall then serve to justify the budget? There can be nothing 
for this but the attempt to obtain an average and 
approximate equality of service through the construction 
of a budget made up of a widely selected and carefully 
proportioned variety of consumption goods. Indemnity to 
the borrower for utilities parted with must be found in an 

purposes of the exchange process : thus Marx, finding, as he thought, that 
utility could not be this common quality, forthwith inferred that 
labor cost must be the quality sought. 

Recalling that only the two facts, utility and scarcity, must concur 
for the emergence of value, and that scarcity is essential only because 
solely on terms of it can all items of a stock possess utility, and recall- 
ing also that some articles have scarcity and value irrespective of labor 
cost and independent of it, it has seemed to follow that utility is that 
common quality by virtue of which different goods come to be com- 
parable in their appeal to human choice. 

But that goods appeal to the individual only through their utility 
to him does not imply the existence of some one aspect or quality of 
utility common to all articles of value ; there are, indeed, no value 
facts affording equal utility to all individuals, none that are constant at 
all times in their service to any one individual, and none even that at all 
times are serviceable to the same individual in even the slightest 
degree. 

But it none the less remains true that for the emergence of value 
the supply of any good must icanifest some degree of scarcity relative 
to the desire for it; otherwise there can be nowhere an individual 
with reference to whom the stock can establish a marginal significance 
by virtue of which it may impose upon that individual a sacrifice in 
purchase cost or in productive outlay. 

Thus the possession of marginal utility — ^but all the while as 
dependent upon this relative scarcity — is sufficient for the existence of 
market value. But this utility is in no sense a social or a common or 
an objective utility, but is in every case purely a relation between the 
good in question and the desires of an individual. The only fact both 
constant and objective in the market-value phenomenon is that of com- 
manding a price, money or other — that is, of possessing exchange 
power. 

But does this fact of exchange power, expressed as command over 
some quid pro quo, imply in any sense, in either of the articles 
exchanged, the possession of the measure function? 

In a certain sense, doubtless, any comparison by an individual of the 
utility to him of different items of goods implies a process of mental 
measurement ; and it must be admitted that a comparison of utility with 
utility is the very process and the only process through which the indi- 
vidual trader arrives at the disposition to trade. But in this trader's 
barter activity there is rarely for him an equality of utility between 
the thing received and the thing parted with, never, indeed, an equality 



THE STANDARD OF DEFERRED PAYMENTS 183 

equally important aggregate of utilities returned. Here, 
as everywhere in the individual reckoning, money is an 
intermediate between utility quantities and not between 
value quantities. 

It is possible that a change in point of view may aid in 
the solution of this not oversimple and very important 
problem. 

Suppose the only products in society to be hats and 

excepting in his marginal trade or in the case of the marginal trader; 
and there is never in any case, marginal or other, any necessity or 
occasion for the measure function or calculation, otherwise than to 
the degree and in the sense that measure is implied in the mere fact 
of comparison and choice, — a sort of mutual measuring of either com- 
modity by the other. 

Nor is the difficulty with the existence of a market-value measure 
that utility may not be the measure of utility, if only the utility to 
different persons were the same utility, a common and objective reality. 
It is, in truth, the very essential of a measure that it possess in itself 
the quality it is to measure in other things. Only something of length 
can measure length ; only something of weight can measure weight. And 
the choice of a measure is necessarily arbitrary ; to express any dimen- 
sion of any given body is possible only in terms of relativity and only 
by reporting it as such a part or such a multiple of the dimension of 
some other body. So many pounds of weight is merely so many times 
the weight of another chosen body, taken at a certain purity, under pre- 
scribed conditions of temperature and of altitude. 

Nor, seemingly, is Professor Laughlin correct in insisting that the 
psychological necessities of the measure function prescribe that the 
measure fact be a fixed and definite and unchangeable fact, but is only 
correct in the implied insistence that, so far as the measure falls short 
of this test, it so far loses its serviceability for the purposes in hand, 
and must rank as a defective measure ; the quantity of utility or of 
value fails of receiving accurate statement and definition in the pur- 
ported measure. So, whatever the objective fact may be with regard to 
the precise invariability of the accepted measure, it is fairly clear that, 
thought of as a seriously variable measure, the measure thereby ceases 
to be a practicable measure. No one thing of utility or of value can, 
then, ever, market-wise, by its quantum, serviceably and adequately 
express the utility or value quantum of another thing ; the first thing, 
the purported-measure thing, has no stable quantum of its own, but is, 
by its very nature, constantly varying ; thus it is, by this very fact, 
not a practicable measure. 

But there is a difficulty in the case which is decisive against the 
presence of any measure function, good or bad : All measurement 
whether vague or precise, is a quantitative comparison; the standard 
must, then, contain a quantum of some certain quality or magnitude, 
which certain quality or magnitude must in some degree be present in 
the thing to be measured. To the individual, therefore, it is not impos- 
sible that either item in a transaction of barter express in terms of its 



1 84 VALUE AND DISTRIBUTION 

shoes, and that it somehow comes about that for each item 
of either kind of goods today there are tomorrow two 
items of goods : what does it mean to say that values have 
increased and that thus there is room for the emergence of 
interest ? Goods have increased, utihty has increased, goods 
having value have increased; one hat will not buy more 
shoes than one hat would buy yesterday, but two hats will 
buy more than the one hat of yesterday would buy. There- 
utility, more or less accurately, the utility of the other item. But not 
so with market value ; here nothing is asserted or implied as to any 
general or objective utility, nor can the mere brute fact of exchange 
parity import a parity of utility for traders in general or any sort of 
market-utility calculus or parity. Utility to whom? Market utility 
parities or calculations are, indeed, ex vi termini, sheer absurdities. 

The case is bad enough with any attempt to set up a market-price 
or market-value measure of utility ; it is still worse with any attempt at 
the market-value measure of market value. The difficulty here is that 
value, in this market sense, fails in the requirement fundamental to the 
notion of measurement, namely, that a measure must be quantitative 
and must measure things of quantity. But market value is neither a 
magnitude nor a quantity, but only a ratio. True, a ratio can be 
restated as a fraction — J4 or J^^ or ^ of unity — ^but it becomes quanti- 
tative only in becoming concrete, as J^ or ^ or % of something. 
Thus, that the exchange ratio between hats and shoes is, say, 2 to i, 
oifers no possibility of giving quantitative expression to the exchange 
ratios of horses and wheat to each other or to anything else. Nor does 
the selection of a conventional price commodity avoid the difficulty in 
any other sense than that it makes possible of comparison the ratio of 
horses to gold with the ratio of hats to gold — all to the conclusion that 
while horses stand to dollars as 100 to i, hats stand to dollars as i to i. 
This expresses merely the two different exchange ratios held by the 
respective commodities to gold — asserts, that is, two different powers 
of command over gold, and then declares that one power is one 
hundred times as great as the other. But merely as different ratios to 
gold no measure is disclosed: (i) the value of gold is itself possible 
of expression not as a ratio of exchange to commodities in general, for 
there is no such exchange possible and no ratio for its expression, but 
only as one or another out of countless different possible ratios. 
(2) This same ratio of 100 to i between horses and hats is equally 
valid to express the ratios of countless other pairs of commodities 
relative to gold, e. g., pianos to Idtchen tables, houses to sewing- 
machines, shoes to laces. The ratios of things to one another in Brob- 
dignag were the same ratios as in Lilliput. The real difficulty is again 
that all these various ratios to gold are mere ratios of exchange, and 
are comparable simply and only with this significance and as entirely 
lacking in any ultimate basis or content. In this respect the case 
differs from true measure ratios of weight or length. With weight the 
reference is to the quantitative objective reality of pressure or stress — 
with length, to the objective quantitative fact of extension. With the 
value ratio, however, there is nothing but the ratio. 



THE STANDARD OF DEFERRED PAYMENTS 185 

fore, measured in shoes, the hats, having increased in num- 
ber, have more value. But this is to accept shoes as a 
standard. Shoes Hkewise, since they have increased in 
volume, can be shown to have proportionately increased in 
value, if only hats be accepted as the standard: as why 
should they not ? But, on the other hand, why should they ? 
Are either hats or shoes invariable in any quality important 
to value, and, if so, in what quality? There is no quality 
other than utility that can have claim to consideration. But 
with these expansions of supply, the utility quantity has 
fallen, per item of supply. Value can in this case mean 
nothing but the ratio of exchange between hats and shoes, 
and this ratio has not changed. How talk about an increase 
in the total of exchange ratios? By just so much as some 
things gain in value others must lose; and those that gain, 
gain only as stated in terms of others. It follows there- 
fore that to return an equal sum of values means nothing, 
unless it be merely a poor way of expressing the return 
of an unchanged quantity of utility. 

But equality of utility is not a relation capable of 
expression in terms of value, either for contemporaneous 
exchange or for exchange over intervals of time or space. 
And inasmuch as utility is purely a fact of the individual 
psychology, it is not susceptible of quantitative objective 
expression of any sort. Thus the return of an equal sum of 
utilities can be achieved only so far as this is possible — and 
in the sense that it is possible — through the adoption of 
some conventional standard or medium. True, price is a 
special case of value ; and thus to resort to price in arriving 
at equality of utility is, in this sense and so far forth, a 
value process. But that gold, like any other commodity, 
obtains its exchange standing through market-value adjust- 
ments, and must, as exchange power, itself express a value 
relation, proves simply that resort is being had to one sort 
of value fact — and this a special and peculiar case — as 
mere intermediate to the most expedient solution of 
a pure utility problem. But no value equality is 



l86 VALUE AND DISTRIBUTION 

possible in the case, and even were one possible, it would 
be irrelevant. 

Appeal to the fundamental principle that all saving is 
merely postponed consumption enforces the conclusion that 
the payment of a loan should be made upon the principle of 
indemnity, that is, should be the return of rights of con- 
sumption of equal importance with those parted with, which 
is merely another way of saying that the standard of 
deferred payments is ultimately a problem in utility rather 
than in value. 

Or the argument may be put in another way : 
All cases of mortgages, notes and bonds, bank deposits, and 
credits in general are protracted instances of exchange. The whole- 
saler sells his groceries at three months time. Instead of receiving 
his pay immediately in commodities, or in money with which to 
buy commodities, the payment side of the trade is postponed for a 

term of months When you lend money you really sell 

the right to things ; when you are repaid, you get things in return. 
Thus a loan is, in essence, a long-time barter. When you have 
sold your hats, and allow X to take the money for which they sell, 
it is the same as if you had sold X the hats, or the goods which he 
buys with the money. When he pays you, he really returns to you 
remuneration for the hats. If the payment is a fair one, the 
money which he pays you must not have gained or lost in its 
control over the means of satisfying human wants." 

Clearly, also, this utility indemnity can rarely, if ever, 
be attained through a return of goods specifically like in 
kind and volume to the earlier sum. It again becomes evi- 
dent, then, that to the extent that the equality is attainable 
at all, the payment will have to be required in terms of 
general purchasing power, and this according to some 
standard, conventional or occasional. And while the pay- 
ment for earlier money by later money is the return of a 
thing of value in payment for another thing of value, and, in 
this sense therefore, is a transaction in values, and while it 
must be admitted that any equality in utility can, in any 
particular case, be only approximate, it is still true that no 

" Davenport, op. cit., sec 170. 



THE STANDARD OF DEFERRED PAYMENTS 187 

assertion of an equality in values is in any way possible, 
since the different money sums are rarely, if ever, exchanged 
against the same sorts of goods ; and even were they so 
exchanged, the same bulk, number, weight, or other meas- 
ure of concrete commodities is, with varying times, a very 
different and changing fact in its aspect of service, — not, 
be it noted, to human needs in general — which would be a 
strong enough case, but rather to the particular needs of the 
specific human being under consideration.® 

Thus — forestalling a little the interest problem — there 
is, restated as a problem worked out in terms of money, 
no great difficulty in explaining why, with the more goods 
existing by the aid of capital, a higher price should be 
obtainable therefor, and thereby a money premium be 
chargeable and payable. But at what rate? And it should 

®A possible difficulty here requires to be provided for — the modi- 
fications which changes in standards of living impose upon the principle 
of utility indemnity, in the mere sense of objectively equivalent goods. 
"With increasing effectiveness of labor, human needs have expanded. 
That which was once relative comfort has become privation — privation 
absolutely in view of higher standards of desire — privation relatively 
in view of higher levels of comfort or luxury in society. The causes 
which have served to make greater consumption possible have them- 
selves made greater consumption necessary. Payment in an equal 
amount of control over the objects of human desire is not an adequate 
return for the earlier sacrifice. If even exchange of work would be 

overpayment, even exchange of utility would be underpayment 

That the creditor receive a volume of commodities — services included 
— merely equal to the volume lent, would be enough, were the creditor 
substantially the same creditor in needs and requirements — if, for 
example, the advance in labor effectiveness had taken place in a night, 
immediately after the loan was made and its proceeds consumed. By 
this very measure of usefulness, payment must be made in something 
more than an equivalent command over commodities. The increased 
effectiveness of labor has brought about a higher level of consumption 

— a raised standard of comfort and of life The line, then, of 

compensation — of equality in sacrifice — must be found somewhere above 
equality in purchasing power, somewhere below equality in command 
over human effort. Something must be added to payment on account 
of the greater necessities of the lender ; something also on account of 
greater requirements for the maintenance of social position and rela- 
tive well-being. The point of fair adjustment is to be found where the 
direct gain from larger satisfactions is offset by the disadvantage of 
increased requirements and decreased command over social distinction." 
— Davenport, op. cit., sec. 16$. 



l88 VALUE AND DISTRIBUTION 

now be clear that interest also is not a problem of value or 
of value surplus but rather of price and of price surplus. '^ 

^ It is perhaps worth while, as illustrative of the general trend of 
discussion with regard to the standard of deferred payments, to note 
that Mr, C. M. Walsh, in his brilliant discussion in The Fundamental 
Problem of Monetary Science, proceeds altogether upon the assump- 
tion that the problem cannot be other than one of value ; takes this 
as so far axiomatic as to require no proof, and devotes himself 
entirely to the attempt to decide which form or concept of value — cost 
value, esteem value, or exchange value — is best adapted to the needs of 
the problem. 

As early as upon page i he sets forth that "that is the best money 
which approaches nearest to being stable in value." Any variety of 
utility standard is foreclosed from consideration by the easy dictum 
that "the idea of use value is of course to be left out of the discus- 
sion" — page II — and it thereupon gets left out. Then, having ably and 
convincingly driven the labor-cost standard from the field, and having 
also, to his own satisfaction, disposed of esteem value — probably 
meaning thereby subjective value in the Austrian sense — he finds that 
exchange value, being the only thing left, affords the only possible 
standard of deferred payments. Just how, finally, the desired equality 
in exchange power between loan and payment could be ascertained or 
proved is not, at least to the present writer, made fully manifest. 



CHAPTER XIV 
INTEREST 

While, as has already been argued, and as will later be 
further argued, interest has its basis in the advantages 
attaching to present goods over future goods, it is never- 
theless to be defined, in a competitive economy, as the 
premium which present purchasing pozver, as money< or in 
terms of money, commands over future purchasing power 
in terms of money. 

But why does this premium exist ? Is it at all due to the 
technological productivity which present wealth, in form of 
instrumental goods, manifests with passing time? Or does 
interest merely express the fact that some men find it to 
their advantage, or at least to their choice, to promise, 
against lOO dollars of command over present consumption 
rights, the payment at the end of a given term of 105 
dollars of this purchasing power? x^nd what bearing 
upon the rate of premium has the common preference for 
using purchasing power for purposes of immediate con- 
sumption — the common indisposition to postpone consump- 
tion — to save? And how about those people who, in their 
rational or irrational solicitude for the future, would save 
even without any money agio — persons to whom some 
forecasted change of need is a sufficient present induce- 
ment and premium upon saving, if indeed, any premium of 
any sort is needed in their case ? 

And what is the precise relation of technological 
productivity to the problem? After all, is not the 
entire interest relation one between present consump- 
tion goods, or rights to consumption goods, as over 
against future consumption goods, or rights to con- 
sumption goods? The rate of agio, or of discount, having 
been established in the consumption-goods market, have 



IpO VALUE AND DISTRIBUTION 

these technological considerations more to do with the case 
than this, that such technological methods and processes as 
promise a productive agio sufficient to overbalance the 
market discount to which the future product is to be sub- 
jected in getting a present worth, are found practicable of 
undertaking? Or put it as follows: the abstinence protest 
being such in society that 105 units of purchasing power, 
expressed in the conventional standard, due a year hence, 
exchange today against only 100 such units for today's use* 
— has technological productivity any other relation to the 
case than this, that such technological uses as can promise 
105 a year from today on account of the 100 now, are fea- 
sible of undertaking? And what of the 100 that can regu- 
larly and recurrently transform itself yearly into no? Must 
it not, by this very fact, be said to be not 100 but 200, if, of 
course, this 10 agio is to be imputed to it rather than to the 
management of it? That is to say, are not all rentals and 
all rent-bearers capitalized into a present worth upon the 
basis of a discount rate which is obtained without reference 
to them? 

Land recurrently pays a rent ; machinery also commands 
a hire : are these hires mere rents or are they time-discount 
facts? If 100 of land rent is due a year from now, this rent 
has a present worth of 95-(— And likewise if machinery 
belonging to me, or a mortgage now running in my favor, 
will bring 100 a year hence, this 100 suffers a discount to 
95+ in the process of getting over into a present worth. If 
this 100 were itself interest upon an invested principal sum 
of 2,000, shall not the 5 of interest be taken to show that this 
time-discount rate is itself based upon some underlying 
time-discount rate? That is to say, if all rents and hires 
themselves are subject to the principle of time discount, 
what becomes of these rents and hires as themselves the 
explanation of the phenomenon of time discount? Can this 
discount fact be taken as a mere result of the fact that all 
machines and farms worth 2,000 each are earning 100 each? 
Or is it not rather true that if they each earn 100 annually. 



INTEREST 191 

we therefore call them each worth 2,000? And why is this 
the case? Whence is derived this rate of 5 by which to do 
this capitalizing? For if the 5 per cent, rate is derived 
from the fact that the 2,000 earned 100, it will not do to 
invoke, in the same breath, this rate in order to explain that 
the rented fact has 2,000 of value. 

Proof that all instruments earn rentals for time use will 
perhaps suffice to prove value productivity; but will it also 
suffice or contribute to explain interest? Or is time dis- 
count rather a phenomenon belonging exclusively to con- 
sumption goods or to purchasing power in the time aspect — 
which time discount is then applied to place a present worth 
upon each recurring rent payment separately, and to make 
possible a capital value as the sum of the present worths of 
a series of rents? 

It is not uncommonly said that each productive agent, 
labor, for example, is paid according to its value produc- 
tivity. But if the laborer is paid before his product is 
marketable, the wage received must be lower by the measure 
of the time discount. And it is likewise said of capital that 
its remuneration is the equivalent of the value productivity 
of the capital. But why is the total value of the capital 
scaled down to correspond to the present worth of its 
future returns? 

Or to put the problem in still another way — for every 
possible device must be invoked to the end of getting this 
most elusive of problems adequately stated: All that the 
distributive outcome of production can ever show is that, 
out of the aggregate production, 105 is to be imputed to 
capital where only 100 of capital originally went in; why 
was the capital that was going in, and that was to emerge 
as this 105 of result, worth only 100 in the beginning? 
Why not originally worth 105? 

But 100 what? And 105 what? Are these anything 
but dollars, or purchasing power in terms of dollars as the 
standard? Is interest anything more than a standard dif- 
ferential due to the rents which instrumental goods. 



192 VALUE AND DISTRIBUTION 

appraised in money, afford in money, and to premiums 
which present purchasing power or present money com- 
mands, for consumption purposes, over future purchasing 
power expressed in terms of the standard? 

And is there, after all, any problem of surplus value 
with relation to interest, any more than, with the question 
of the standard of deferred payments, there was found to 
be a problem of equality in value? Is it possible to say, 
because there is a physical net return upon instrumental 
goods, that there therefore is or is not an increase of value 
or a net return of value? The increased weight-and-tale 
total of goods may sell for less as well as for more money; 
but even in the case of an ad- itted increase capable of 
being established as a physical net return attributable to a 
particular and isolated instrument good — a case, we will 
assume, of a cow worth at the beginning of the year $ioo 
and represented at the end of the year by the sam^e cow in 
equally good condition, and, together with her, a net gain of 
$5 worth of calf ; even in this simplest of cases is it possible 
to say that there has been any increase of value? The 105 
dollars will not, ordinarily, indeed, ci nnot, be used to 
purchase the same things ; some of the goods which would 
have been bought and consumed by some one or other, had 
the cow been sold or killed, its price spent, and its quid pro 
quo consumed, have risen in price and some have fallen, 
some are no longer in the market, the while that others, 
before entirely unknown, have appeared in the market ; and 
in any case, the utilities attached to the same objective 
goods cannot be the same utilities; men change, seasons 
change, temperature changes, food requirements change, 
fashions change. Is the more of the 105 an increase in 
point of value, or rather is it merely and purely a question 
of change in the aggregate of service, a comparison of 
the total of utility commanded by the 105 of standard as 
against the earlier 100 of standard? Is interest truly a 
value problem in any other sense than that, by the process 
of discount, different and otherwise incomparable utility 



INTEREST 193 

volumes are brought into relation for one and the same 
time ? ^ 

But even if all this is satisfactorily answered, there will 
remain the difficulty of tracing out the process of determina- 
tion of this rate of discount, and of deciding precisely what 
parts, relatively to each other, technological productivity 
and psychological time preference have in the determina- 
tion. 

Again, have we here a problem of present goods against 
future goods, or rather only a problem in the field of 
abstract capital, of the loan fund, an investigation of the 
relation of a quantum of the standard, or of purchasing 
power in terms of the standard, at one time, as against a 
quantum of standard at another time — the problem of how 
much of standard a year hence equates against 100 of 
standard of today? and then, why? 

If the solution is, indeed, along this last line, it is 
perhaps easy to see why, with a premium offered by differ- 
ent borrowers for the present standard for consumption 

^ But we may well stop to ask what all this, when resolved, will 
have to do with the present status and the development of the argu- 
ment. 

As a cost-of-production computation, in the competitive reckoning, 
all hires of productive instruments and all interest charges of any sort 
must be included in the computation. That is to say, cost includes 
wages, rent of land, all rents of all other instruments, and also the 
interest-discount charge due upon the time employment of entre- 
preneur capital. 

The value problem, upon the cost-of-production level of analysis, 
cannot do . otherwise than to accept the discount rate as a datum, an 
underlying and definitive fact requiring no examination, precisely as 
the cost-of-production analysis accepts without question and takes for 
granted all value hires and value rentals upon instrumental or agent 
facts. On this level we have no concern with the theory of interest ; 
it is only when we come to the examination of the determinants 
of entrepreneur cost — to the situation facts — and to a discussion of the 
distributive process, and to an examination of the fixation of the 
distributive shares, that the problem of interest is logically before us. 

But practically speaking, in the exigencies of exposition, it has 
seemed necessary to treat the problem of interest here, in order to 
determine what interest payments really are, and upon what sort of 
capital they are computed, and to justify their inclusion as they are in 
costs ; and then finally to get out of our path all other associated 
questions of the ultimate basis of interest and of the process of its 
determination. 



194 VALUE AND DISTRIBUTION 

purposes, and other premiums offered by different entre- 
preneurs for the wherewithal to acquire present instru- 
mental goods, and with varying dispositions on the part of 
savers to save, and of possessors of wealth to abstain from 
its consumption, and with varying dispositions on the part 
of owners of wealth to exploit their own possessions, there 
should result, through the value mechanism of the market, 
a ratio of exchange, a discount rate, between the standard 
as a present fact and the standard as a future fact. 

But now, assuming that for the time we have questions 
enough and possible solutions enough before us, it may 
somewhat illuminate the problem, as well as somewhat 
further the solution, the while, however, possibly raising 
more questions, if we turn to examine for a little the details 
of the treatment of the problem by several of those authors 
who appear best to have appreciated its difficulty, and who 
have most contributed to its solution. 

Boehm-Bawerk's explanation of interest rests in part 
upon the technological productivity of capital and in part 
upon the principle of perspective in consumption — this 
latter expressing the preference commonly, though not 
always, felt for the present good as consumable item, over 
against the future good — his definition of interest running 
"a difference in value between present and future goods 
in favor of the former." ^ 

That "perspective" means merely the indisposi- 
tion to postpone consumption, and is thus the same 
thing, under another name, as abstinence, would per- 
haps not be admitted by Boehm-Bawerk ; this would sound 
too much like a cost view — whether pain cost or some other 
type of cost — and thus would not fit well into the demand- 
utility point of view in the explanation of value. In the 
main, however, Boehm-Bawerk's emphasis is upon produc- 
tivity, perhaps because the "perspective" doctrine has, 
under its aspect of abstinence, been already sufficiently 
emphasized. 

'Positive Theory of Capital, p. 273. 



INTEREST 195 

But, according to Boehm-Bawerk, all sorts of errors 
have associated themselves with this principle of produc- 
tivity. One hundred dollars' worth of capital, or one 
hundred dollars' worth of labor, must be accounted produc- 
tive even though productive of only fifty dollars worth of 
product. Smart has thus summarized this particular aspect 
of the argument: 

Capital would still be productive though it produced no inter- 
est, e. g., if it increased the supply of commodities the 

price of which fell in inverse ratio The [productivity] 

theory .... does not explain why capital employed in produc- 
tion regularly increases to a value greater than itself 

The theory that explains interest must explain surplus 

value Labor by no means always produces more value 

than it consumes. But the plausibility of the productivity theory 
is the parallelism it assumes between labor and capital, the sug- 
gestion that interest is wages for capital's work. But .... 
value cannot come from production. Neither capital nor labor 

can produce it What labor does is to produce a quantity 

of commodities, and what capital co-operating with labor usually 
does is to increase that quantity. [And the value may or may not 
be more.] How .... can it be that capital employed in pro- 
duction not only reproduces its own value, but produces a value 
greater than itself ? ^ 

Boehm-Bawerk accepts the distinction between land 
instruments and non-land instruments, and rules out these 
former, together with consumption goods, from the capital 
category: "Objects of immediate consumption .... 
and land, as not produced, stand outside our conception of 
capital. It does not fall within our province to go into the 
theory of land rent." * 

Certainly the principle of "perspective" — of abstinence 
— does not apply to land instruments directly, since they are 
not consumption goods : but this would apply equally well 
to cut out most other instrumental goods. True, the non- 
land instruments could be marketed, or worn out, and their 
price used for immediate consumption wants; but this is 

^ Eugen V. Boehm-Bawerk, Capital and Interest, translated by 
William Smart, Introduction, p. ii. 

*Ibid., p. 6. 



196 VALUE AND DISTRIBUTION 

equally true of land. The notion of abstinence applies, 
then, equally to either, unless in the sense of the original 
labor of production — an argument from origins, and not a 
technological argument — a line of distinction in no wise 
applicable for competitive purposes, because beyond the 
possibility of application. No one can possibly tell what 
part of land fertility is or is not produced; and, for pur- 
poses of competitive production, or of personal abstinence 
in a competitive society, no one could have the slightest 
interest to inquire. 

But of course it may nevertheless be true that the theory 
of land rent in no wise concerns the theory of interest; 
possibly enough, no question of rentals of any sort and no 
question of any hire or remuneration upon any kind of pro- 
ductive instruments or agents can have any bearing upon 
the rate of time discount ; this is, indeed, one of our diffi- 
cult problems ; but if other rents and hires have this bear- 
mg, so also have land rents; if others have not, land rents 
have not. At any rate, next year's rent has to be discounted 
in order to get it into a present value, and the entire series 
of future rents have to be discounted to find a present 
market value for the land or other instrument; and it is 
clear that land is a future good as much as is any other 
instrument, and is paid for as are other instruments, accord- 
ing to the duration of the use granted. 

Before productivity can be used to explain discount, 
explanation must be found for the division of the gross 
result of capital into original fact and surplus fact; and 
this upon the face of it would not appear to be difficult. 
We started with 100 in value — [price?] — and come out with 
105 ; mere inspection would seem to suffice for the discovery 
of a surplus of 5. Yes, but why is it that the 100 that 
would accomplish this thing was worth only 100 in the 
beginning? To get the 100 of present value as the capital 
residuum after the surplus is deducted, we have to make 
use of this 5 as the discounted surplus ; and it does not 
then seem open to explain the existence of the 5 by deduct- 
ing the 100 from the gross 105. 

The adherents [of the productivity theory] .... understand 
it as meaning that, by the aid of capital, more is produced; that 
capital is the cause of a particular productive surplus result 



INTEREST 197 

The words "to produce more" or "a productive surplus result" 
may mean one of two things. They may either mean that capital 
produces more goods or more value, and these are in no way 

identical 

That "capital is productive" .... may signify four things : 

1. Capital has the capacity of serving towards the production 
of goods. 

2. Capital has the power of serving towards the production 
of more goods than could be produced without it. 

3. Capital has the power of serving towards the production of 
more value than could be produced without it. 

4. Capital has the power of producing more value than it has 
in itself.' 

Neither from the point of view of inadequacy nor of 
irrelevancy need Boehm-Bawerk's criticism of proposition 
I detain us long ; proposition 2 he rightly declares to be use- 
ful only as subordinate to 3 and as somehow serving as the 
basis of 3 ; and then must be confronted the difficulty of 
getting 4 out of 3. 

Capital does not produce alone; but it is certain that 
capital and other production goods working together get a 
greater total of results by weight and tale than can be had 
without the capital. But the first difficulty (by Boehm- 
Bawerk hardly touched, but by Wieser adequately recog- 
nized) is to find out why, in the distributive process, capital 
gets any part of this surplus, or does not get more or all 
of it, and does get just what we find it getting. This, how- 
ever, may be regarded as a problem in distribution, and, 
perhaps, for the time being, may be taken, without further 
ado, as solvable, and as solved; that is to say, the theory 
of capital rent may possibly, for the purpose of the present 
argument, be set out of the discussion, precisely as Boehm- 
Bawerk has in fact declined to enter upon any consideration 
of the theory of land rent. Even so, however, this other 
work will have to be assumed to have been elsewhere done. 
But Boehm-Bawerk does not, so far as non-land instru- 
ments are concerned, appear to have assumed this, but 
rather to have taken it as part of his problem, and then to 
have omitted the necessary anaylsis ; but we shall see. 

But at any rate, admitting that to capital, in the co- 
operative production process, more goods or better goods 
can be traced and ascribed and accounted, this falls a good 

^Ibid., pp. 1 1 3-1 5' 



198 VALUE AND DISTRIBUTION 

way short of proving that the value of this larger sum is 
greater than the value of the original holding. For (i) 
how make sure that the 105 goods have the more of value 
over the 100? and (2), this explained, how then explain 
that the 100 of original holding did not forthwith take on 
this 105 of value? 

Does the fact that capital when employed is regularly followed 
by the appearance of a surplus in value, actually contain a sufficient 
proof that capital possesses a power to create value? .... Is 
the appearance of the snow a sufficient proof that a magic power 
resides in the summer snow to force up the quicksilver? .... 
Value is not produced and cannot be produced. What is produced 
is never anything but form, shape, material, combinations of 
material ; therefore things, goods. These goods do not bring value 
with them ready made, as something inherent that accompanies 

production Value grows not out of the past of goods but 

out of the future. It comes, not out of the workshop where 
goods come into existence, but out of the wants which these goods 
will satisfy. Value cannot be forged like a hammer or woven like 

a sheet What production can do is never anything more 

than to create goods, in' the hope that, according to the anticipated 
relations of demand and supply, they will obtain value.® 

That capital does not directly produce value or surplus 
value, but only the things that have value, or that have 
value in excess of the original value, must be — for what- 
ever it is worth — admitted. Nor does it matter to the con- 
trary that all of this insistence upon value being derived 
from wants — from utility motiving demand, rather than in 
any part upon the supply situation — is of most dubious 
doctrinal validity. It still remains true that (i) the emer- 
gence of a surplus in value needs more proof than the mere 
existence of an increased volume of goods; and (2) this 
value step being accomplished, the problem would then 
exist of explaining why the greater value of the result was 
not forthwith reflected back upon the instrument, to the 
final cancellation of the surplus first established. But evi- 
dently all of this discussion on the part of Boehm-Bawerk 
must assume the quantitative comparability of an earlier 
with a later value. But if there is, in the nature of the case, 
as has been in earlier pages argued, no such thing possible 

"Boehm-Bawerk, op. cit., pp. 133, 134. 



INTEREST 199 

as this comparison of values, what then remain to be 
compared ? 

Is comparison more practicable between present goods 
and future goods? This has also been shown to be 
impossible, even were it not the fact that the case actually 
presented by capital productivity is one of production 
instruments at the beginning, and of consumption goods 
at the close. This objection has been forcibly urged by 
Wieser : 

Do the arms, bows, and nets — the capital of von Thumen's 
illustration — really reproduce themselves in the strictest sense of 
the term? Certainly not. They produce nothing but fish and the 

spoils of the chase The return which, in the first instance, 

falls to be imputed to them is, consequently, a gross return in 
foreign things .... things with which they may possibly be 
compared in value but not in quantity The same argu- 
ment holds for capital in the developed economy, only that here 

the conditions are somewhat more complicated No 

capital .... directly reproduces itself; each produces first a 
gross value in foreign things, in which, physically, its productivity 
cannot be seen. The capital of a baker produces bread, that of a 
miller, meal, that of a peasant, grain. In order that the baker may 
replace his capital again .... the gross return .... must be 
exchanged against the gross return of other capitals, indeed, 
against those returns which are attributed to land and labor, in 
order that the capital may be replaced, and the net return physically 
cognizable.' 

Von Wieser's solution of the difficulty is, seemingly, 
an appeal to the facts of distribution, to the rental remu- 
neration apportioned to capital through the competition of 
entrepreneurs. To the detail, the mechanism, and the 
processes of this distributive imputation, Wieser especially 
devotes attention. As for Boehm-Bawerk, as has been 
already noted, this distributive result is taken for granted; 
for us, however, the only fact of present importance is 
this — that to explain rentals or to assume their explanation 
is not to explain interest, although the explanation of 
interest may — or, for that matter, may not — be somehow 
hidden in the phenomenon of rentals.^ 

^ Friedrich von Wieser, Natimal Value, edited with a preface and 
analysis by William Smart, translated by Christian A. Malloch. Mac- 
millan, 1893 (original, Der natiirliche Wert, Prag, 1888). 

^ "The task of our theory is, in the last resort, to prove the value 
productivity of capital ; but for this purpose it is necessary first to 



200 VALUE AND DISTRIBUTION 

Our present quarrel is, however, essentially one with 
the explanation of capital rental as given by Boehm- 
Bawerk. He insists strongly that the problem is (i) a 
value problem; (2) a surplus-value problem; the lack of 
clear appreciation of this value problem is, indeed, the 
gravamen of his complaint against all preceding interest 
theory. And why is it necessarily a value problem? 
Otherwise there can come out of the situation analyzed no 
surplus value. But in addition — and this receives all 
emphasis at the hands of Boehm-Bawerk — the problem 
must be fundamentally one of goods, and at the same time, 
of goods that are of comparable quality, for there could be 
no value productivity unless as based upon physical pro- 
ductivity. 

Wieser's first criticism of Boehm-Bawerk's position 
was, then, that even with physical productivity there could 
result no value productivity, unless as the outcome of some 
distributional process, or processes, more or less mysterious 
and more or less shrilly calling for elucidation. 

prove the fact of physical productivity [gross, not net, one assumes] 
as the scaffolding on which the other rests. The value productivity 
already presupposes the determination of the value of capital, but the 
value of capital can only be determined when the question of how to 
impute the physical return has been answered, because the value of 
capital rests on the share of return imputed Isugerechnef] to it. 
Just as the rent must first be ascertained before the value of any land 
can be calculated, and just as, generally speaking, the rules of imputa- 
tion must be recognized before the value of production goods can be 
determined, so must also the imputation of the return to capital first 
be settled before we can take up the problem of its value." — Wieser, 
op. cit., p. 126. 

"The theory of interest, like that of rent, has always been dis- 
cussed .... without any previous examination of the general laws 
of imputation. The result, however, as regards interest, has been 

immensely less satisfactory than as regards rent In the case 

of interest, we have to deal with the essential fact in the problem of 
imputation, while in the case of rent we have to deal substantially 
with a detail capable of being conceived by itself, that, namely, of the 
differential imputation." — Ibid., p. 128, note. 

But, after all, it is evident that three steps are involved in any 
complete proof — (i) physical productivity, (2) net value productivity, 
(3) discount. And it is as to this third step, the derivation of the fact 
of discount upon rentals from the mere fact of rentals, if indeed, the 
derivation can be accomplished, that Wieser's account of the case 
appears to be seriously lacking. 



INTEREST 20I 

But Boehm-Bawerk answered — not to Wieser, but to 
Clark, although Wieser's criticism came earlier than that 
of Clark, Wieser 1888, Clark 1893 — that if a productivity 
could be established such that less goods of an earlier 
time could be set over against more goods of a later time, 
and if an increase of this kind could be established as gen- 
eral over the entire field of capital employment, a value 
productivity could thereupon be inferred. 

It is, then, at this point that the notable controversy 
between Professor Boehm-Bawerk and Professor John B. 
Clark comes so exactly to fit our need. Clark's attack," 
aside from its abstract-capital arguments and aspects which 
do not at present concern us, was precisely along the line 
of Wieser's criticisms as to the nature of physical pro- 
ductivity. Clark makes it clear that it is "not the recogni- 
tion of time as an element in the problem of interest" that 
he would criticize, "but the manner in which time is made 
to act." In reality, "time does not put a discount upon par- 
ticular goods; particular concrete goods are not, in actual 
life, subjected to comparison. It is not the driving-horse 
of '93 that is compared with one in '94." The capitalist 
does not decide, if he buys, to buy a horse, and finally con- 
clude to do the buying at the end of a year. Nor, in fact, 
do the rainy-day savers — "quasi-capitalists" Clark calls 
them, since they have not definitively abandoned all idea of 
consumption, but are merely postponing — nor do these 
rainy-day people have in mind 

goods of like kind and quantity The marked antithesis 

between that which they forego today and that which they expect 
to purchase later affords, indeed, the motive for their postponing. 
They do, no doubt, compare a sum of wealth [But do they? or only 
a sum of weal — an aggregate of expected services commanded by 
alternatives of purchasing power?] existing today with a like sum 
to be used later. 

Clark attributes the error charged to Boehm-Bawerk to 
the acceptance of the notion of capital as concrete goods : 

* "The Genesis of Capital," Yale Review, Vol. II, p. 302 (Novem- 
ber, 1893). 



202 VALUE AND DISTRIBUTION 

For the common and practical conception of capital as a perma- 
nent fund or amount of wealth expressible in money though not 
actually embodied in money, there is substituted the conception of 
concrete goods distinguishable from others by the place that they 
occupy in the order of industrial phenomena. 

For evidently, it is insisted, if capital at the outset and 
capital in a later aspect are to be compared, there will have 
to be a comparison of concrete tangible goods, or of these 
goods as expressed in some measure. And Clark insists 
that this comparison is actually, commercially, experien- 
tially, not of goods of like kind and quantity; if it is at all 
a comparison of concrete goods it must be of machinery 
for production with products for consumption; failing this, 
it must be of two aggregates of value — of two "sums of 
wealth," or of "amounts of wealth expressible in money;" 
and at this point Clark declares himself as standing for the 
money expression. 

But is it possible to express value under any other form, 
to give it any denominator intelligible as between different 
men, otherwise than in terms of some conventional stand- 
ard ? In truth, when capital is expressed as a value quantity, 
is there anything for it but to use the money standard? 
Capital is wealth under the money denominator, 
since there is no other denominator possible. For ordinary 
purposes, truly, this difference between value and price is 
not significant. But for purposes of comparison over 
intervals of time or space, the difference is theoretically of 
fundamental import. For, whatever may be the truth for 
current exchanges, it is clear that for deferred-payment 
relations the only possible device for comparison must be 
found in some conventionally adopted standard of com- 
parison. 

But all this is, to the individual, not so very different 
from a value comparison ; it is, for his purposes, unlike the 
ordinary non-deferred payment case only in this, that, with 
the deferred payment, each of the articles compared is an 
item out of an entirely different system of value exchanges 
from that of the other. Prices in current exchanges are 
merely and simply value phenomena expressed in some one 
commodity intermediate, conventionally selected for the 
purpose. As value phenomena, value items, two prices out 



INTEREST 203 

of distinct systems of exchange relations are not possible 
of comparison ; the equality or inequality is merely one in 
terms of two bullion weights out of different value situa- 
tions and systems. That the market price of a given horse 
is today $100 is the expression of a value relation between 
horse and metal ; that the payment will be made a year 
from today in $105 is simply to say that a certain promised 
quantum of metal, — an aggregate of items out of a later 
value system, and, from the point of view of the present, 
of an unknowable exchange significance in that system, — is 
today exchangeable against the horse or against its equiva- 
lent 100 items of metal ; no equivalence in value between the 
two sums of items of metal is asserted in any other sense 
than as a mere repetition of the brute and opaque fact that 
the 100 and the 105 are exchanging against each other. 

Up to this point there is, then, nothing but commenda- 
tion to be accorded to Clark's formulation. It is, however, 
true — or seemingly true — that he, as well as Boehm- 
Bawerk, assumes for capital a concrete tangible material 
basis, as a body of existing material things, out of which 
the money or value situation proceeds, and for which it 
stands ; that is to say, his concept of capital requires, as the 
basis of the capital, an existing sum of industrial goods 
and intermediate products, social capital, but, all the while, 
subjected to a competitive, individualistic value adjust- 
ment. But in point of fact, as his corporation-illustration 
of capital, a favorite with him, shows, this price or value- 
denominator form of capital may be invested in all the 
various sorts of marketable or intermediately advantageous 
facts ; there is no certainty — there is, indeed, no probability — 
that the total corporate capital ever will be, — or even if it 
ever is, will long remain, made up in its entirety of social 
capital as distinguished from consumption goods, rights, 
claims, franchises, good-will, and such other assets of 
similarly non-concrete character as a going business con- 
cern may find to its purpose. 

Boehm-Bawerk appears to accept a goodly share of 
Clark's contention, still, however, making shift somehow to 
keep up with his talk of "goods." 

According to my view the superiority of present over future 
goods is based upon the very fact that one can, as a rule, make a 
different and more advantageous use of goods now present than 



564 VALUE AND DISTRIBUTION 

one can make of an equal quantity [?] of goods [?] which are not 
to be at one's disposal until some future moment.^" 

But what, Boehm-Bawerk asks, can this equal quantity 
of goods be, if not the same quantum of the same kind of 
goods? What sort of equaHty and what guarantee of 
equaHty can there otherwise be? 

According to my theory, the man who saves will weigh whether 
the two hundred florins will have a greater value [ subjective 
value? ulitity? service?] for him if consumed now as "present 
dollars," or if reserved for like use as "future dollars." .... 
Strictly speaking, the example chosen by Professor Clark is not a 
case of comparing present and future "goods" but only one of 
comparing present and future uses of the same sum of wealth 
[money? purchasing power in terms of money?]. But .... 
the decisive ideas are the same." 

And still insisting that he has not hereby abandoned 
his comparison of goods of "like kind and quantity," and 
declining to admit that he has gone over to a mere equality 
in terms of the conventional standard, Boehm-Bawerk 
continues : 

Why do I add to my proposition that present goods are worth 
more in the average than future goods, the further qualification 
that they are worth more than goods of like kind and quantity? 
Simply because that without the second half of the proposition, 

the first half would be neither intelligible nor complete 

To express clearly and correctly the superiority which difference 
of time gives present goods over future goods one must compare 
things of like kind, for example, dollars with dollars, and not 
diamonds with pebbles, and of like quantity, one thousand with one 

thousand, and not one thousand with two thousand 

Especially would it be inadmissible .... to place over against 
each other like sums of value, instead of like sums of 

wealth One would have to make the logically inconsistent 

assertion that a certain present value is greater than an equally 

great future value Professor Clark speaks of a "sum of 

wealth," or an "amount of wealth." .... But .... if Pro- 
fessor Clark would force himself to a precise definition of his 
meaning, he would have to assert either exactly what I assert, or 

^° "The Positive Theory of Capital and Its Critics," Qu<ir, Jour, of 
Econ., Vol. IX, p. ii8 (January, 1895). 

"^ Ibid., p. 117. 



INTEREST 205 

something positively false For either he would mean by 

his amount of wealth an amount of goods, and in this sense, if he 
is to demonstrate the superiority of present goods, he must neces- 
sarily have reference .... to goods "of like kind and quantity," 
or he means an amount of value, and then the assertion .... 
contains the self-contradiction just criticised.^ 

And this would, indeed, be a serious difficulty if, as 
Boehm-Bawerk assumes, the alternatives presented offered 
the only possible solutions. But there is all the while the 
third possibility, that of the equality, in the present reckon- 
ing, of a future quantum of the standard with a present 
quantum of the standard. 

And all the while Boehm-Bawerk stoutly insists that he 
is abiding by his notion of capital as concrete tangible 
goods, exclusive, one still assumes, of land. 

But Clark, in his rejoinder,^^ insisting that the very state- 
ment of the interest problem conceives the case in terms of 
a fund and of income upon this fund and not in terms of 
concrete capital goods, mercilessly forces home the "com- 
parison" issue. He denies that $1,000 at one time and 
$1,000 at another time can compare goods of like kind 
and quantity, though of course admitting that these dollars 
are, in a sense, themselves goods of like kind and quantity : 

The sum in the present will buy certain things, and a like sum 
hereafter will buy different things. Professor Boehm-Ba- 
werk .... compares present and future goods of like kind and 
number, because he compares present dollars with future dol- 
lars .[The possessor of present wealth] compares two dif- 
ferent subjective values obtainable by two different modes, of 
spending present money 

He objects to Boehm-Bawerk's fashion of bringing 
money into the discussion, and then of objecting to "sums 
or quantities of wealth The things to be com- 
pared are a dollar's worth of whatever-you-please now and 
a dollar's worth of whatever-you-please hereafter." 

Nothing better than this or more clarifying for the 
purposes of the present discussion could be asked, nothing 

^ Ibid,, pp. 125, 126. 

" "The Origin of Interest," Quar. Jour, of Econ., Vol. IX, p. 257 
(April, 1895). 



2o6 VALUE AND DISTRIBUTION 

more conclusive also, and it is hardly gracious to stop to 
regret that Professor Clark appears to believe that what a 
capitalist "really estimates is like quantities of wealth meas- 
urable in money;" for really the measurement function is 
not present. But for the purposes presently in hand this 
is mostly an irrelevant inaccuracy. 

The discussion — this aspect of it — closes with Boehm- 
Bawerk's practical admission of the entire charge made 
against him : "Professor Clark seems to assume that I 
have, in my last article, 'introduced into the problem for the 
first time' the case of money In this he is mis- 
taken, etc. ;" for Boehm-Bawerk asserts that he has done 
the thing over and again in the Positive Theory — in all of 
which the truth is clearly with Boehm-Bawerk — the more 
so, the more unfortunately for him, for in precisely so far 
is he disloyal to the doctrine, as held by him, of the con- 
creteness of capital, and even more obtrusively disloyal to 
his comparison of "like kinds and quantities of goods." ^* 

Bearing in mind that Boehm-Bawerk stands for capital 
as concrete non-land forms of wealth, and repudiates in 
terms — whatever else he does impliedly — the value or price 

14 '"pjjg Origin of Interest," Quar. Jour, of Ecoti., Vol, IX, p. 380. 

The fact that concrete items of commodity, like ice, wine, or 
wheat, often increase in value with keeping, appeals to Macfarlane 
(Charles W. Macfarlane, "Value and Distribution," Lippincott's, 1900, 
p. 196) as "of course fatal to the contention that present goods are, as 
a rule, worth more than future goods." 

These cases might properly be used to compel a retreat by Boehm- 
Bawerk from his position that capital is a category of concrete goods, 
to the tenable ground that capital is the price aspect of the concrete 
goods ; but so far from being inconsistent with the doctrine that 
present values command an agio over future values, the wine case, at 
least, is an illustrative case of a capitalistic process taking place in 
time. Boehm-Bawerk stands for the view that ten dollars' worth of 
ice or wine or wheat of next year is not worth ten dollars now. This is 
not inconsistent with the fact that waiting till next year may change ten 
dollars' worth of present commodities into a then sum of value greater 
than ten dollars. The future value does not now rank as equal to a 
present value of the same denomination, but with time a change takes 
place in the volume of value, and for that reason the waiting is done. 
True, as Macfarlane argues, the increase in value may arise, as in the 
case of the wine or of the wheat, through changes in the demand ; but 
this is merely to say that a year from now the then value will be 
greater than is the notv value, not that the future good is now more 
valuable than the present good. 



INTEREST 207 

expression as an essential element in the capital concept 
for the existing competitive organization of society, some 
attention must now be directed to his interpretation of 
roundaboutness in capitalistic production as bearing upon 
interest theory. His proposition seems to be that, with a 
given development of technique, only a limited volume of 
capital can be applied to production, at any given degree of 
directness in productive methods ; that only on terms of 
increasing roundaboutness can a market for more capital, 
and scarcity for any capital, become possible; and that 
increasing roundaboutness necessitates or implies the fact 
of diminishing returns. 

We shall, in a later chapter, have occasion to question 
this alleged necessity of diminishing return anywhere in 
the dynamic field — whether for land or capital or labor — 
excepting upon the underlying assumption that the different 
factors in production or the different sorts of instru- 
mental goods are manifesting different rates of increase, 
as, indeed, they commonly are. But in the actual situation 
of things, Boehm-Bawerk is doubtless right in his conten- 
tion that capital goods tend, at present, toward diminishing 
productivity in some sense, not altogether clear, either of 
product by weight and tale, or of product by utility meas- 
ure, or of product by value measure. There is a limit to 
the instruments that, in any given situation of technique, 
of labor, and of land, can be absorbed without diminishing 
advantage. There is, however, nothing to show that this 
fact of diminishing return is due to greater technological 
roundaboutness ; there would, in truth, be this same law in 
more obtrusive manifestation, were the productive period 
not possibly to be lengthened; and there might be increas- 
ing volumes of capital consistently with shorter periods of 
production — shorter processes. 

Yet surely it is true that "every extension of the pro- 
ductive process leads generally to some surplus result," ^^ 

" The use by Boehm-Bawerk of this roundaboutness doctrine is the 
point against which Professor Fetter has directed a most searching and 
destructive criticism. It would be hard to separate from the discus- 
sions of the present text that which is dye directly to Professor Fetter 
and that which belongs to the author. Bat, in the main, so far as the 



2o8 VALUE AND DISTRIBUTION 

and it is doubtless true also that, with a given volume of 
capital, the more time, the more productivity ; capital works 
in time. But this is equally true of land, and is the basis 
of rent on either land or capital. And it is — or may be — 
true that "production is more or less capitalistic according 
to the average remoteness" at which return comes to pro- 
ductive powers. But here again the principle applies 
equally to land powers, that is to say, the question is merely 
one of the importance of time in getting results out of 
instruments of production — no great discovery. The fact 
seems to be that the more any good helps in production — 
value-wise, as market-determined — the greater is it in 
volume as capital ; but the farther away its product is in 
point of time the less is the present worth of its product, 
and thereby the less the value — the capital quantity — of 
the good as capital. 

Capital is — and herein lies the chief point of its productive 
efficiency — an effective intermediate cause of the consummation of 

this profitable roundabout process I say "intermediate 

cause," not "cause." Capital gives no independent impulse; it only 

present discussion is not directly borrowed from Professor Fetter, it 
has been suggested by him. 

At the same time, it is fair to say that Professor Clark, in the 
controversial articles lately referred to, has, in essentials, anticipated 
Professor Fetter's criticisms ; all this, however, in the process of intro- 
ducing or of supporting his regrettable abstract-capital concept, and, 
possibly, without entire appreciation of the full reach and import of the 
objections formulated by him to the position of Boehm-Bawerk. 

So far as refers to Professor Fetter's treatment of time value — 
interest in the widely inclusive sense of the term — the doctrine should, 
perhaps, be rather held to be that of Wieser than of Fetter, though 
here also Fetter's discussion, in its development of the principle and in 
its consciousness of the significance and extent of the principle, is by 
much to be preferred. 

The following is from Natural Value, p. 141 : 

"Every capital value — not alone the value of a sum of money but 
of every perishable productive instrument — is calculated by discounting 
(compare Menger, p. 135) ; that is to say, from the value of the 
future expected sum of products into which the capital will be trans- 
formed, the corresponding net return is deducted. Only that, prac- 
tically, in discounting money claims, a fixed rate of interest, i. e., a 
definite relation between capital value and net return, is always 
assumed, and always emerges, while we are explaining the formation 
of this relation by first discovering the principle for estimating capital 
value," 

No intention exists here to credit Wieser — or Menger — with origi- 
nality in this regard ; I have made no attempt to trace the doctrine back 
to its origin ; sympathetically interpreted. Say, at any rate, appears to 
contain it. See p. 116. 



INTEREST 209 

transmits an impulse given it by the original productive powers, 

just as one billiard ball transmits motion to another 

Capital is also the indirect cause of other profitable roundabout 
ways of production being entered upon — other, that is, than those 
in the course of which it itself has come into existence. When a 
people possesses much capital not only can it successfully complete 
those processes in the course of which the capital presently existing 
has come into being, but it can also adopt other and new 

methods The greater the stock of capital, the larger is 

the share taken by the productive powers of the past in providing 
means of consumption for the present, and the less are the new 
productive powers of the present drav/n on for the present." 

But as ultimate cause, certainly, it is only when we con- 
ceive of subsistence goods as capital that it is possible to 
regard capital as in any degree explaining the roundabout- 
ness of the industrial process ; only so far as capital in 
possession affects the aggregate of production may it bear 
upon the saving possible to take place. "In this sense but 
only in this sense, is it possible to say that man must 
already have capital before he can enter on roundabout 
methods of production. "^"^ 

On something like this ground — it will be remembered 
— was Jevons led to assert that only subsistence goods are 
capital. But Boehm-Bawerk expressly dissents from this 
view; he denies that consumption goods are capital, even 
denies that long-time consumption goods, e. g., a house 
occupied by its owner, are capital, and asserts that only 
when there comes a fore-product — an intermediate product 
— has capital emerged.^^ 

All this, then, makes him appear to say that there are 
two distinct causes co-operating to increase the roundabout- 
ness of production: (i) larger supplies of capital, and 
(2) larger supplies of something not capital. His recon- 
ciliation for this apparent contradiction would probably be 
found in the view that these larger margins of goods over 
pressing current needs are relevant only to explain the 
larger supplies of instrumental goods — capital proper — and 
through them the greater roundaboutness in productive 
methods. 

But precisely what does this notion of roundaboutness 
accurately mean? Surely to stop fishing, in order to make 

" Boehm-Bawerk, op. cit., p. 92. 

"Ibid., p. 93. 

"J&iU, p. 96. 



210 VALUE AND DISTRIBUTION 

a fish pole whereby later to catch more fish, is a round- 
about method, since it is the interposing of a time-consum- 
ing process of getting ready to do the thing finally to be 
done, a submission to waiting, an abstinence. But is there 
therefore any warrant for saying that when once the fisher- 
man has his pole in readiness, he will require with it a 
longer time than formerly in order to catch his first fish, 
and will derive his benefit only through the fact that, 
undergoing a longer-time process, he obtains a more than 
proportionally larger catch? Why not equally well more 
fish in the same time? 

After all, is there in this fact of roundaboutness any- 
thing more, necessarily or characteristically, than a more- 
ness of waiting as volume rather than a moreness purely as 
duration? If more capital goes into steam shovels, may it 
not be merely into more shovels of the old type; or, if into 
those of a new type, may these not be simply more 
elaborate and more expensive methods of doing the same 
work in fewer days? more breadth of waiting with less 
length ? 

But it may evidently be true that the larger capacity for 
waiting derived by society from the diminishing pressure 
of imperative needs upon producing power, may be turned 
to the development of methods demanding longer periods 
of time; with the sacrifice-significance of saving counting 
for less, vinegar and wine may advantageously be given 
longer and longer periods for the developing and ripening 
of their finer but less essential qualities. And so there will 
probably come many appliances demanding periods of 
longer duration, but justified, under the new conditions of 
waiting-burden, by the extra results achieved. But it is 
hardly to be believed that all new savings will go into this 
longer-time direction of change. But even of those that do 
so go, not all will go into instrumental goods of the tech- 
nological sort ; on the contrary some of the new power will 
go into better-constructed and more durable houses, long- 
time provision against future needs rationally and advan- 
tageously provided in the present time — that is, into future 
goods subject to the discount process into present worth — 
future income rendered over into a present value reckon- 
ing — that is, the emergence of capital and interest, with all 
the materials of the capitalization process, but with only 
consumption goods in question. And other savings will be 
going both into durable and into temporary improvements 



INTEREST 211 

upon the land ; and meanwhile, under the lower stress of 
present need, the original powers of the soil are coming 
to be better husbanded, their destruction or impairment 
avoided, their profitable future results waited for. Absti- 
nence is a land fact as well as a non-land fact. 

But this is not, for present purposes, the only point of 
identity between consumption goods — consumable goods — 
and instrumental goods, or between non-land instruments 
and land instruments. Concurrently with Boehm-Bawerk's 
insistence that, as a question of origin, capital is not an 
independent element of production, in this respect, there- 
fore, differing from land, he finds it also to his purpose to 
refute the ancient doctrine that capital is merely stored-up 
labor, and asserts of capital, as regarded from the produc- 
tive-efficiency point of view: "Capital . . . . is stored 
up labor, but it is something more ; it is stored up valuable 
natural power." [Italics are the present writer's.] ^^ 

But not only does this abandon the distinction of 
origin between land and capital, but it also forsakes the 
concrete-capital notion for the value concept; it conceives 
of capital as an intermediate fact through which the two 
original facts — man and environment — exert their instru- 
mentality; and thus capital now appears as something 
which is not land, but yet is stored-up land product in its 
price-value expression. 

In the chapter next following there appears to be also 
express recognition of non-instrumental forms of capital — 
the loan-fund form — or what may conceivably be classed 
as the abstract-capital form : 

This encroaching on the moment's enjoyment need by no means 
involve downright privation. With more productive labor, Cru- 
soe's choice might not lie ... . between bare living and com- 
fortable living, but, perhaps, between comfortable and ample 

living The essential thing is that the current endowment 

of productive powers should not be entirely claimed for the 
immediate consumption of the current period, but that a portion of 
this endowment should be retained for the consumption of a 

future period A saving of productive powers, be it noted; 

for productive powers, and not the goods that constitute capital, 
are the immediate objects of saving. This is an important point, 
which must be strongly emphasized because, in the current view, 
too little consideration is given to it. Man saves consumption 

" Boehm-Bawerk, op. cit., p. 99, 



212 VALUE AND DISTRIBUTION 

goods, his means of enjoyment; he thus saves productive powers, 
and with these finally he can produce capital The immedi- 
ate cause of the production of capital is production; the mediate 

cause is saving It is only exceptionally that capital itself 

is the immediate object of saving; it may happen in the case of 
those goods which, by nature, admit of being used either for pro- 
duction or for consumption, such as grain. To the extent that a 
man withdraws such goods from immediate use in consumption, 
his saving directly lays the foundation of capital.™ 

But whether all this can be strained to bear the loan- 
fund or abstract-capital interpretation, may perhaps be best 
decided by Boehm-Bawerk's analysis of the methods by 
which savings work out into the existence of concrete 
instrumental goods. Here, manifestly, the process is 
entirely misconceived; it is not true that 

if the owner lend his wealth to others .... for consump- 
tion .... the sum lent is a direct advance of subsistence to the 
borrower; .... if for production .... it passes, as already 
described, from the borrowing employer to the laborers, as advance 
of subsistence. Thus the entire accumulated wealth of society — 
with the very trifling exception of that portion which the owners 
themselves consume — is really brought into the market as supply, 
of advances of subsistence.''^ 

The bearing of the mere fact of perspective upon the 
interest rate is admitted and indeed asserted by Boehm- 
Bawerk : 

There are three factors, each of which, independently of the 
other, is adequate to account for a difference between present and 
future goods in favor of the former. These three factors are : 
The difference in the circumstances of provision between the present 
and the future; the underestimate, due to perspective, of future 
advantages and future goods; and finally, the greater fruitfulness 
of lengthy methods of production. 

The needy and careless value present goods more highly 
because they urgently require them in the present or think only 
about the present; the well off and the saving value them because 
they can accomplish more with them in the future. And thus, in 
the long run, everyone, whatever his economic position and what- 
ever his economic temperament, has some ground for valuing 
present goods more highly than future.^ 

™ Boehm-Bawerk, op. cit., pp. 102, 103. 
^ Ibid., p. 321. 
'^ Ibid., p. 277. 



INTEREST 213 

There is, indeed, no writer to deny the influence of per- 
spective, although Wieser appears to criticize the rational 
justification for the influence,-^ and is not entirely definite 
as to its independent sufficiency for the emergence of an 
interest rate. 

Fetter apparently ascribes the interest phenomenon 
entirely to perspective, allowing to productivity only such 
influence as it indirectly exercises through the effect upon 
the supply of goods with which the perspective principle 
concerns itself.^* 

Carver, insisting that were there no indisposition to 
save, no abstinence cost for capital, there could be no limi- 
tation upon the supply of capital — a pain-cost doctrine for 
the aggregate capital supply, with the implication that the 
cost margin is found at the highest point of saving-pain,' — 
finds the demand to be made up of requirements partly for 
technological purposes and partly for consumption; the 
point of adjustment between the supply and the demand is 



^ "At bottom the economic conflict between the needs of today 
and those of tomorrow is really of a moral nature ; it is a special 
case of the struggle between impulse and reason." — Wieser, op. cit., p. 17. 

"Present and future wants coming into competition with each 
other, are as a rule to be regarded as equal ; that is to say, the differ- 
ence in time does not necessitate any difference in valuation. To this 
proposition we have now to add a second : that within the sphere of 
production the difference in time does necessitate a difference in valua- 
tion of the goods employed in production. The two propositions are 

in perfect accord and mutually supplement one another If 

capital .... is able to yield continuously the same returns, this 
must find expression in a valuation which ascribes to capital a higher 
value, the earlier the point of time it comes into our possession. For 
the earlier the point of time, the earlier, and consequently the greater, 
the return that may be expected." — Wieser, op. cit., p. 143. 

°* I confess my inability to justify, by direct quotation or by strict 
logical necessity, this interpretation. It seems to me, however, to be 
necessitated by the general trend and direction both of Professor 
Fetter's critical and of his constructive work. At any rate, I am 
totally unable, otherwise than upon this interpretation, to make out 
the relation posited by him between technological productivity and time 
discount. 



214 VALUE AND DISTRIBUTION 

the interest rate : ^^ all of which Boehm-Bawerk would 
accept, with some mild protest about the word abstinence, 
and with much relative insistence and emphasis upon 
demand or utility, and finally with a peremptory call that 
the value-surplus fact get somehow out of all this a definite 
explanation. And in this call the economic world will join, 
at the same time, however, probably denying that Boehm- 
Bawerk has himself performed the task, as set forth by 
him m the following: 

The statement of how productivity of capital works into and 
together with the other two grounds of the higher estimation of 
present goods, I consider one of the most difficult problems of the 
theory of interest and at the same time the one which must decide 
the fate of that theory.^^ 

In view of all this explicit recognition of perspective, it 
only remains, for purposes of review and of criticism, to 
set forth, without extended comment, the surprising doc- 
trines both of Boehm-Bawerk and of Wieser in respect 
to land rentals, and, less distinctly enunciated, the logically 
associated doctrines for consumption loans. 

In a certain sense interest on production and interest on con- 
sumption have a common source. Both of them relate to a differ- 
ence in the valuation of present and of future goods, only that the 
causes which produce this difference are distinct. (Wieser, op. cit., 

p. ISS-) 

If they [houses] are to be produced, there must be the prospect 
that their value will include the full and permanent maintenance 
of the undertaker's capital, whether this value be realized through 

selling or through letting the property The interest of hire 

or let must, therefore, stand at the usual amount of interest on 
capital. It is an application of the law of costs, according to which 
the customary interest on capital is reckoned among costs. (Wieser, 
op. cit., p. 157.) 

The value of land is calculated .... by capitalizing the rent 

of land In order to capitalize, a given rate of interest is 

necessary; and that an interest rate may be given, we need capi- 
tal Land has not the same double function as productive 

"^ "The Place of Abstinence in the Theory of Interest," Quar. Jour, 
of Econ., October, 1893. 

^' Positive Theory, p. 277, note. 



INTEREST 215 

factor and as product. It produces without being produced; and 
thus, to determine the value of land, it becomes necessary to bring 
to our aid the standard of capitalization which we find in capital. 
(Wieser, op. cit., pp. 158, 159.) 

This implies either that abstinence is not sufficient as the 
basis of an interest rate, or that the individual owner of 
land exercises no abstinence with regard to it, or that, in 
general, there is no interest possible excepting by deriva- 
tion from technological non-land productivity together with 
some sort of distributive imputation. 

That interest is possible independently of technological 
productivity would seem to be inferable from Boehm- 
Bawerk's assertion of the threefold basis; if so, however, 
this must mean that interest is not a phenomenon appear- 
ing exclusively in connection with capital, but, on the con- 
trary, may attach to something which is not capital. And 
yet, on page 49 of the Positive Theory, in discussing Knies's 
concept of capital, with especial reference to interest on 
money loans, it is said; 

Does the interest-bearing money belong to capital, or does it 
not? .... If we answer in the negative .... we commit our- 
selves to the strange doctrine that a thing which undoubtedly bears 
interest is not capital. 

It is, however, in a later chapter said that interest may 
be paid for the use of land; that land is to be regarded 
as a productive instrument equally with capital ; like capi- 
tal, it manifests its productivity in time, and also somehow, 
by virtue of its concrete productivity, furnishes, like capi- 
tal, the basis of value productivity. 

The theoretical explanation of rent from land coincides ulti- 
mately with the explanation of interest obtained from durable 
concrete capital, and land rent is nothing but a special case of 

interest obtained from durable goods Manifestly the fact 

that rent of land and rent of capital have one common final cause 
is not a sufficient reason for abolishing every distinction between 
them. Between land and capital there are so many important dif- 
ferences, both theoretical and practical, that, notwithstanding the 
common feature just described, we are justified in adhering to the 
decision made in a former chapter to keep land out of the concep- 
tion of capital." 

^Positive Theory, pp. 355-57. 

It may be worth while, for purposes of a convenient summary, 
to reproduce Boehm-Bawerk's own synopsis of the reasons referred to 



2l6 VALUE AND DISTRIBUTION 

That the services from any durable consumption good, 
a house, for example, are mainly future services, and are 
thereby subject to a discount into present worth as the 
capitalized value of the house, is fully and clearly asserted 
by Boehm-Bawerk ; but here again the concept of capital is 
not widened to include goods of this sort; they are regarded 
as mere long-time consumption goods and not capital, on 
the ground that they are not "intermediate products, des- 
tined to serve toward further production." But none the 
less is it said : 

Our theory traces back the profits which durable goods yield 
their owner to the selfsame causes as explain interest on loans 

and undertaker's profit on production Supposing that the 

other kinds of interest could be explained by the productivity of 
capital, obviously this was no explanation of the interest yielded by 
a durable consumption good which produced nothing, such as 
a dwelling-house, household furniture, a hired piano, the books 

of a lending library The true primary fact is the lower 

value of future goods and future services.'^ 

in support of the distinction under consideration. The bracketed inter- 
polations must be pardoned in the interests of space. 

"In many essential respects land and capital take different ways : 
(i) The former is immovable; the latter, for the most part, movable 
[irrelevant] ; (2) the former is a gift of nature ; the latter a result of 
labor [Neither side of the antithesis is always true ; and Boehm- 
Bawerk has himself admitted as much for the latter statement.] ; 
(3) the former cannot be increased; the latter can be [untrue] ; (4) the 
landowner has a social and economic position essentially different 
from that of the capitalist ; property in land is justified on essentially 
different grounds from property in movables [ethics, law, or politics — 
at all events not economics] ; (5) land is the special object of a kind of 
production which is economically distinguished by many important 
peculiarities [Technology? At any rate, diminishing returns are not 
peculiar to land.] ; (6) income from land, while subject to many laws in 
common with income from capital, obeys many distinct laws of its 
own — land rent, for instance, rising with economical development, 
while interest falls." [As Boehm-Bawerk has just shown, capital rent 
and land rent capitalize under precisely the same rate ; and many 
forces in economic development bear to diminish rent.] — Positive 
Theory, p. 55. 

'^ Ibid., pp. 346-49. 



CHAPTER XV 
INTEREST (concluded) 

To discuss economic problems in terms of price rather 
than of value, to place the emphasis upon money rather 
than upon the things that money will buy, to talk of nomi- 
nal rather than of real wages, is commonly accepted as the 
mark of superficial thinking; that price is a mere half-way 
house between value and value or between utility and 
utility has come to mean that it is for most theoretical pur- 
poses no house at all. 

It is nevertheless important to appreciate how much of 
modern economic life woud be different, and how much 
of economic theory would require reformulation, were 
there no money and no money price. The problem reaches 
even so far, indeed, as to have raised the question whether, 
without a money denominator, the value problem would 
be possible of solution. What would be the theoretical 
situation were there no conventional standard and medium? 

It is at any rate evident that, at no matter what incon- 
venience, there would be barter enough in this money- 
less society; division and specialization of emplo)Tiient 
would obtain very much as under present conditions ; 
recognized value relations would establish themselves 
between such classes of goods as in considerable measure 
were exchanged against each other, and under some sort of 
arbitrage these relations would acquire a considerable 
degree of definiteness. That is to say, value relations 
would exist essentially as at present, but all this without 
any price system. But would there exist no medium of 
exchange? No. Or, rather, there would be not one 
medium but an indefinite number of media; for by trading 
and retrading, possessors of commodities for exchange 
would finally place themselves in command of commodities 
exchangeable against the particular commodities desired; 

217 



2i8 VALUE AND DISTRIBUTION 

this, indeed, would be the method of arbitrage by which a 
fairly complete system of value relations would get itself 
established. That is to say, each man would, as his neces- 
sities should dictate, be employing a medium of exchange, 
-an intermediate between his wares for sale and the con- 
sumption goods desired by him, but this intermediate would 
be, for different men, and for each man at different times, 
a different medium. 

A money economy exists only when one intermediate 
of exchange and medium of value expression is conven- 
tionally established. 

So far, however, no great issues appear to depend upon 
the presence of t money-price system. But how about 
deferred payments, and speculative or long-time merchan- 
dising, and all the ramifications of the system of credit? 

Whatever may be the fact with regard to subjective 
value — of which more later — it must be true that market 
value can be expressed only in terms of something else; but 
expressed, be it noted, and not measured, and expressed 
only in the sense of the equivalency implied in the mere 
fact of exchange. 

Not merely so, but value can never be expressed in 
terms of more than one thing at a time — any more than the 
height of any particular man can be expressed as the 
height of a dozen different men at once. The market value 
of any one thing is, then, expressible as a ratio of exchange 
with reference to any one of all the different things against 
which the commodity in question is actually exchanged. 

In German usage, Preis is the generic term for the good 
on either side of an exchange, in its function of quid pro quo- 
If the exchange relation is one of goods against the money 
good, the money is called the Geld-Preis. In English usage — 
as goes without saying — price has been limited to mean ex- 
change power expressed in terms of money solely. Thus, 
while on the whole the German usage may well appear to be 
the more philosophical, it must remain true that popularly 
price means the money that a thing will sell for, and that 



INTEREST 219 

some term for this money relation, this expression of 
exchange power in terms of a conventionally specialized 
money commodity, is imperatively called for. 

But in relations of exchange over considerable intervals 
of time or of space, the case no longer presents itself as one 
of terminology but rather as one of controlling business 
necessity. Here the only feasible quid pro quo is the money 
intermediate ; no other price than money price has practical 
standing in the problem; price and money price are one. 

What, indeed, would be the deferred-payment situation 
in the absence of any conventional standard in which the 
deferred-payment relation might be expressed? The 
farmer would hardly contract to accept a hay payment as 
against his present advances of hay, nor much more prob- 
ably, any variety of grain ; later, as well as now, he is likely 
to have these in surplus. There would be nothing for it 
but to sell against the promise of whatever com- 
modity should seem most likely to be the commodity 
desired at the expiration of the payment term, or to arrange 
to receive that commodity seemingly most likely to be read- 
ily marketable as an intermediate. That is to say, here 
again the result would be not the absence of an inter- 
mediate, but the multiplication of intermediates, and each of 
these would serve, for the respective individual interested, 
merely as a fund of general purchasing power, but of a 
most regrettably speculative quality. 

All of which sums up, as we have already seen, in saying 
that so-called value relations over interval of time are 
really nothing but utility relations worked out in terms of 
price, and that these relations are practicably incapable of 
any other manner of working out. Try to interpret the 
assertion that 100 of today is worth 105 of next year; it 
will be found to mean, (i) that 100 articles of today 
exchange today against the promise of 105 articles of 
similar kind — an exchange relation worked out in terms of 
the present value system — a relation in which either side of 
the exchange is the price expression of the other, without 



220 VALUE AND DISTRIBUTION 

the employment of any money-price mechanism; or (2) 
that either side of the exchange relation commands as much 
money now as does the other now — a price relation of the 
money sort; or (3) that, because of the actually ruling dis- 
count rate, 105 of promised money exchanges against 100 
of present money. But what would it mean to say that the 
105 of the later time will then have the same value that the 
100 has now? The 100 of today — 100 hats or 100 dollars — 
is an item in a present exchange system, a present scheme 
of value relations ; the 105 belongs to another and a distinct 
system. The only value link between the two systems is 
this of exchange relations established between two quanti- 
ties of something chosen as standard for the purpose of the 
deferred-payment relation. And in this standard of 
deferred payment all notion of equality in value under 
some value-measure system is lacking. The situation is 
simply this : By virtue of the fact that the selected inter- 
mediate is one of wide acceptability, and offers, as is 
thought, the closest possible approximation to general 
purchasing power — something approaching an equality in 
utility, in service, is possible; and this is all that is possible. 

But the money medium is not adapted to measure the 
service; and it being true that utility relations in exchange 
are purely personal categories always, it must follow that 
if any commodity exchanged finds anywhere a measure of 
utility, that measure will have to be the quid pro quo of each 
respective act of exchange. But the fact is that to neither 
of the traders can the exchanged commodities be in equi- 
librium of utility, else the exchange would not have taken 
place. The fact of exchange does not, then, anywhere 
attest equality of utility, but only equality of value in the 
sense of actual exchangeability. 

And all this is merely a repetition of the doctrine that 
the interest problem is one of price and of discount reck- 
oned upon price, and that all value productivity, so called, is 
really productivity indicated and proved and expressed 
by increase in price; gains are not value gains in any other 



INTEREST 221 

sense than that they are utility gains worked out in terms 
of price. 

Savings and capital creation. — It was pointed out upon 
an earlier page that the collectivist concept of capital would 
include all technologically completed goods deferred in 
consumption, but would in the main have reference to 
instrumental goods, and this without occasion for any dis- 
tinction between land and other productive instruments. 
Rights and credit claims of various orders could have no 
place; saving, that is to say, would embody itself in con- 
crete material forms ; loan- fund capital could interpose no 
intermediate stages between saving and social capitaliza- 
tion, and no possible justification could exist for the emer- 
gence of any abstract-capital concept. 

It was, however, urged that social saving would have 
this much in common with competitive saving, that, under 
either system, saving must imply postponed consumption; 
private saving, privately postponed consumption; social 
saving, a social postponement, either directly in the saving 
of consumption goods, or indirectly by the diverting of 
productive energies from product ends to instrument 
means. 

But at what point, in a collectivist society, would saving 
and capitalization rationally find their limit? Surely only 
such surplus as should exist over imperative present need 
could go to capitalization; but what would be the farther 
limit ? 

As long as a later utility of larger volume was to be had 
through the postponement of a present service, so long 
saving would be a rational process. In this computation, 
different individuals would have to count at an equality, 
and future members of society and present members of 
society be indifferently regarded. 

But there would still be limitations to be recognized 
upon the postponement policy. The substitution of instru- 
mental goods for labor is, as we have seen, a limited process; 



222 VALUE AND DISTRIBUTION 

the point somewhere arrives where the indirect capitalistic 
method gives no greater product than does the 
direct labor method. Precisely where this point falls is in 
large part a question of the development of industrial tech- 
nique. After the uncivilized man has provided himself 
with one or two boats and a fair supply of poles and lines, 
he will do ill to increase his supply in these directions. 
So for the more skilled workman there is a limit to the 
number of shovels, plows, reapers, or looms that he can 
adequately use or tend. So also the point of capital satura- 
tion is, in any society, in considerable measure a question of 
the standard of comfort, and of the development of varied 
directions of consumption; but in any given situation there 
is a limit point. Again, while, in a collectivist society, haz- 
ards of criminal predation would be inconsiderable, other 
hazards of loss with passing time would need to be con- 
sidered — dangers of fire, and of water, and of wind, and of 
decay. In an environment earth-shaking, like that of Japan, 
the same rational preference as with the Japanese would 
exist for one-storied unsubstantial architecture. And 
finally, the law of diminishing utility with expanding sup- 
ply would have its application; and all the while the com- 
parison of the present with the future would proceed 
neither in terms of value nor of concrete product, but of 
units or totals of service. 

Sufficiently modified, similar limitations hold for the 
isolated individual economy. But here, there enter con- 
siderations of the uncertainty of life, and of needs chan- 
ging in intensity and in direction with advancing age. So 
the appeal of different desires and the recognition of the 
need for saving are greatly modified accordingly as there 
are or are not parents, wife, and offspring to be taken into 
the reckoning. 

Carried over into a competitive society, the necessary 
modifications are more profound and more far reaching. 
Subjective changes in need are more pronounced with a 
more complex life; the objective hazards of property-own- 



INTEREST 223 

ing become in some directions greater, in other directions 
less. And more importantly still, much saving takes place 
for individual purposes which may not at all infer a social 
saving, and which may imply merely a deferred right of 
consumption out of another's mortgaged production, or 
may be even a right of privilege, monopoly, tribute, or 
pension at the charge of one's neighbors. 

Thus, how much the individual may rationally save, and 
the form in which individual saving may rationally take 
place, have little or no reference to the social advantage or 
interest. And the hazards of non-employment, and the 
hazards either of untimely death or of death too long 
delayed, require a measure of saving which may well in the 
average far outrun the average actual need for rainy-day 
purposes.^ Here enter all sorts of considerations of fam- 
ily pride, and of interest in the family prestige of com- 
petitively ostentatious establishments. 

How far may saving extend in a competitive society, 
and what shall be, in the social interest, its theoretical limit? 

H any reply is possible, it cannot be given now (see p. 529, 
note). For present purposes, we need merely to examine 
the actual functioning of abstinence under competitive con- 
ditions. Is it possible here, as in a collective or a Crusoe 
economy, that saving may so far saturate the demand as to 
cancel the interest agio? or as even to involve a negative 
interest — a charge for safe keeping? As not rarely one 
pays to have his traveling-bag guarded, so, under condi- 
tions of undeveloped industrial technique, and of public 
disorder and turbulence, it is within possibility, as earlier 
centuries proved, that negative interest be sometimes 
collected. 

H, to the conditions already assumed, it be added that 
no money system exists, or that the money supply is so 
small, in volume and in employment, as to make impos- 

^ There is something here of bearing upon the question of state 
insurance and the possibly associated problem of oversaving ; but there 
is at present neither time nor space for the discussion. 



224 VALUE AND DISTRIBUTION 

sible or impracticable any considerable saving through its 
mediation, it might readily fall out that the investment 
supply would be large enough to swamp the aggregate 
borrowing demand for consumption purposes or for indus- 
trial or trading purposes. 

Nor, be it noted, does this reasoning assume the can- 
cellation of all abstinence protest or cost; it assumes simply 
that so intense is the appreciation of probable or possible 
future needs, or so great the utility increment due to purely 
subjective considerations, as to overbalance the actual and 
the rational indisposition toward waiting. 

But whether the protest against waiting would be a 
rational one, were the uncertainties of life and of invest- 
ment not constant factors in the problem, is not at all clear. 
And whether generally among men the emphasis is not at 
present too much upon the possibility of old-age penury 
and suffering, and too little upon the fact that youth is the 
period when pleasures are vivid and wealth is rich with 
service, moralists rather than economists may profitably 
discuss ; and whether, on the whole, too great — or too little 
— thought is, under present conditions, devoted to making 
provision for the needs of v/ife and children, and for the 
pride and power of future generations, may also be of 
interest to some one other than the economist. But it is 
here sufificient to note that an affirmative advantage must 
everywhere make goods its case against the fundamental 
preference for immediate enjoyment, else there can be no 
postponement of consumption; and changes of human 
disposition in this direction may greatly vary the relation 
between the demand for capital and its supply. Techno- 
logical productivity does not, then, for all possible condi- 
tions, guarantee an interest agio.- 

^ This fact of psychological perspective, while accepted as an 
opaque definitive datum of human nature — a brute fact, if one may be 
allowed the term in this connection — has had its rationality put much 
in question. Why should not the enjoyment of next year appeal to the 
rational mind as strongly as the enjoyment of today? If it be human 
frailty that it does not, and it is yet the fact that it does not. 



INTEREST 225 

Whether Crusoe should hold a particular item of goods 
over from the present to the future would depend on 
whether, in the present reckoning, the future gratification out- 
economics will have to get along somehow with the situation, but may 
at the same time recognize the irrationality of it. In this connection 
Wieser has already been quoted (p. 213) Pantaleoni also, in dis- 
cussing whether remoteness has to do with the present subjective value 
of goods, otherwise than by virtue of the aspect of uncertainty, says : 
"A remote pleasure or pain, if supposed to be absolutely certain, must, 
other conditions being equal, be of equal weight with a proximate 
pleasure or pain" {Pure Economics, Macmillan, 1898, p. 26). Panta- 
leoni adds that valuations made inconsistently with this principle are 
anti-hedonistic and anti-economic ; but that the principle of con- 
tingency must allow not only for the uncertainty of occurrence but also 
for possible changes in the individual in point of susceptibility to the 
pain or pleasure in question; but it is added: "In the majority of 
instances, these valuations are carried on with only approximate 
correctness. This is tantamount to saying that error is a principal 
source of anti-economic acts, and operates in this sense on a vast 

scale But this admission, although it can and must be made, 

in order to explain real phenomena, consisting of human actions, can 
never be adduced as explanatory of the phenomena of pure or rational 
economics, i. e., of what would occur if all men were perfect 
hedonists." The subject of pure economics approached in this manner 
must become, one would think, mostly a mere discipline. 

With some seeming skepticism as to the rationality of the per- 
spective fact. Carver has nevertheless treated abstinence as a cost fact, 
by arguing from what would become of the interest rate, if postponed 
consumption were not felt as a burden — if there were no indisposition 
to save. ("The Place of Abstinence in the Theory of Interest," Quar. 
Jour, of Econ., October, 1893.) And Sidgwick has speculated upon the 
effects upon the values of productive instruments, land, for example, 
if the interest rate should fall to zero — all to the conclusion that land 
values would be infinite (but I am totally unable to find in my copy of 
Sidgwick the discussion which I seem to myself to remember very 
clearly). It should, perhaps, better have been deduced that, with 
capital services free, land and labor could retain exchange value only 
to the extent that the principle of substitution should not apply — that 
is, only in those cases where the functions of labor and of land could 
not be fulfilled by capital. The outcome, then, of disappearing interest 
should simply be a great diminution in the volume of unfree — valu- 
able — goods, with the valuation of such as remained valuable arrived at 
without the aid of the discount principle — that is to say, with all uses 
present and future equally regarded as present items in one and the 
same exchange system. 

But however all this may be — and it is not altogether clear — it is 
at any rate certain enough that, with abstinence resistance to saving 
entirely removed, great changes, ranging from the infinite value of 
land and labor to the vanishing values of either, might be formulated 
as possible ; and pretty much anything else might also take place, 
since all economic science would be at an end. For the assumption is 



226 VALUE AND DISTRIBUTION 

ranked the present; and if the good in question were one 
of concrete productivity, the same question of choice 
between the present fact and the objectively greater future 

entirely illegitimate. Recalling that the psychology of saving is simply 
that of postponed service, it becomes evident that the assumption of 
willingness indefinitely to postpone consumption is tacitly to abandon 
needs and desires as the bases of economic activity, to assume a total 
lack of demand for products, and thereby to make production an 
absurdity, unless, indeed, as a play activity, like the mud-pie making of 
children — with whom also there is said to exist a precisely similar 
disposition toward indefinite postponement of consumption. 

This view forsakes the fundamental assumptions of the science 
— that human desires are the primary fact in economics, and that all 
production takes place as a mere intermediate tovi^rd consumption ; 
it is, in truth, a doctrine parallel, in its obliviousness of the economic 
center of gravity, to the earlier doctrine of unproductive consumption, 
and to the theoretical view which held laborers' subsistence supplies 
to be technological capital like coal, and that regarded man as a 
machine for the end of turning out product, and held the maximum of 
accumulation to be the economic end and test — a doctrine parallel 
in morals to the insane exaggeration of the virtue of frugality, and to 
the ideal of dying rich as standard of life and measure of success, 
a doctrine which, generally applied, would veto any advance in the 
standard of living, and which, as partially applied in the lethargy 
and chilled demand of post-panic depression, presents not merely the 
bad logic and paradox but the prolonged miseries and disasters of 
underconsumption. 

The science of economics is free of the burden either of justifying 
the ways of God before men or the ways of men before any possible 
tribunal ; but inasmuch as there is no significance in production but as 
a means toward consumption, and no justification for saving but as 
postponed service, it must be as rational as it is fundamental in 
economic life that human nature should prefer the immediate to the 
distant good, and should regard as an evil every postponed consump- 
tion that cannot through positive advantages establish a balance of 
benefit. 

Expectation of increment is, then, everywhere the condition on 
which depends the consent to waiting. Not merely every boy, but 
every man, would forthwith, after breakfast, proceed to make way with 
his lunch but for the fact that a larger service is recognized as attend- 
ant upon the later consumption. True it is, that if there were no 
burden cost in waiting, the supplies of capital would be unlimited ; 
but it is forthwith to be added that if men could content themselves 
with postponing the services of wealth to an indefinite future, they 
would never produce anything for either earlier or later service. 
Unresisting postponement presupposes and assumes an absence of the 
desire for goods ; wealth eternally waited for is not wealth at all. 
There is, as all agree, no utility — no wealth — excepting as related to a 
human need or desire. A desire for a good never to be enjoyed is a 
contradiction in terms ; a good of this sort is a no-good. Unprotesting 
abstinence implies the lack of interest to produce and the absence of 
anything to be saved. Thus, to assume the general and continuous 
non-burdensomeness of postponement is to cancel the possibility of all 



INTEREST 227 

fact would present itself. The cow of today would, for 
example, outrank the cow and calf of next year, if the 
waiting-time subtracted from the appraisal significance of 

economic discussion — to saw off upon the hither side the limb upon 
which all economists are sitting. 

It is doubtless anathema to talk in economics of overproduction ; 
and underconsumption appears like an evasive and timid way of 
saying the same thing. It is commonly argued that the desires of men 
for wealth are absolutely insatiable, or, if not quite this, are, at least, 
far beyond any practical possibility of satiation ; goods in general 
cannot be in superfluity so long as the desires of any member of the 
productive group are still unsatisfied. Mill's argument for this posi- 
tion looks conclusive : Goods themselves furnish the demand for 
goods ; money is a mere intermediate through which goods are exchan- 
ging against one another. Total demand and total supply therefore 
analyze ultimately into the same aggregate of social product ; supply 
can then increase only as demand increases ; overproduction, in any 
other than the purely relative sense, is then an impossibility. 

This would all be clear enough if, in fact, exchanges were always 
of existing goods against existing goods — if, that is, the intermediate 
commodity and other forms of postponed purchasing power were not 
factors in the problem. In truth, however, goods have to be conceived 
in another aspect than this solely of present goods against present 
goods ; the case sometimes presents itself as one of present goods 
against future goods, and for this purpose moneys and credits, as the 
form of quid pro quo into which existing goods are seeking exchange, 
may at one time be receiving a much more marked emphasis than at 
another. When the exaggerated desirability of postponed consump- 
tion obtains, the demand for ordinary commodities slackens. The 
problem then transforms itself into this — how shall men, in the 
average, increase their production and sale of goods consistently with 
a diminished buying and consuming of goods ? 

Without attempting any explanation of the causes lying behind the 
recurrent phenomena of commercial crisis, and confining our atten- 
tion solely to the post-crisis period of depression, we come upon two 
contrasted, though perhaps not conflicting, lines of explanation, the 
one interpreting the situation in terms of disturbed production react- 
ing upon consumption, the other, in terms of disturbed consumption 
reacting upon production ; the one position may be stated as follows : 

"The explanation is found in the imprenditor system, and for the 
most part in the relation of employer with employee. The imprenditor 
buys raw materials and employs laborers for the purpose of making 
profits. He is a mere intermediary. If he is unable in marketing his 
products to make his receipts exceed his outlays, he withdraws from 
production, however social interests may thereby suffer. 

"In the fall of prices following a panic, not all commodities fall 
with equal rapidity. Goods from foreign sources, for example, may 
nearly or quite hold their old level of prices. Other products are 
perhaps produced under conditions more or less approaching monopoly ; 
others again may be well sustained in price through speculative hold- 
ings by the producers or through restriction of output. The imprendi- 



228 VALUE AND DISTRIBUTION 

the future good at a greater rate than the objective pro- 
ductivity of the good could add. 

And now we ask : On what terms, in an individualistic 

tor must produce in view of market prices ; prices are his master. 
If his productive outlays are too high, he must withdraw from business. 
There is, however, for most employers, one resource and one only, 
that of reducing wages. A small reduction may possibly be sufficient. 
But here is precisely the kernel of the difficulty. Even were raw 
materials for all industries falling regularly and equally, the imprendi- 
tor would still be compelled by lower prices of product to reduce the 
wages paid. As a practical fact this is a difficult matter. Laborers 
resist angrily and persistently. They do not understand the necessity 
of the reduction — they believe that they have merely to stand firm. 
To prevent a strike or a long continuance of strained relations, the 
employer often finds it not less profitable and much more comfortable 
to close his shop. In times of depression products are small enough 
at the best. 

"Inertia is a fact that must be reckoned with. Wages rise 
slowly and, when fall is inevitable, fall slowly and with painful strug- 
gle. .... Were it possible for prices to fall evenly all along the 
line, and for wages to be forced to fall in conformity with prices, the 
depression following upon panic would be unimportant and of short 
duration. But (i) as long as indebtedness does not fall as measured 
in money units, there is tremendous resistance — in many cases a 
struggle for very financial existence — against sale and liquidation at the 
ruling level of prices. Even were this difficulty avoided .... 
there would still remain (2) the inequalities already mentioned in the 

fall of commodities generally (3) The difficulty of accurately 

adjusting wage-payments to market prices Capital, labor, 

and employer must co-operate in production. If with any employer 
laborers insist upon all, or more than all, of the product, production 
must cease." — Davenport, op. cit., p. 363. 

To Say, whose loi de debauchees was the beginning of the doctrine 
that a general overproduction is impossible, and whose reasoning was 
later accepted in turn by James Mill, by John Stuart Mill, and by 
Cairnes, this disturbed-production explanation of depression would 
have been entirely satisfactory. But as usual, Malthus was a sceptic ; 
and in his insurgency against the doctrine of the impossibility of a 
"general glut," he contrived finally to put himself into conflict with 
Ricardo. This noteworthy controversy will serve us in good stead as 
background for our general problem : 

"According to the best authorities .... what is meant by the 
glut of a particular commodity is such an abundant supply of it com- 
pared with the demand as to make its price fall below the cost of pro- 
duction ; and what is meant by a general glut is such an abundance of 
a large mass of commodities of different kinds, as to make them all 
fall below the general price, or the ordinary costs of production, with- 
out any proportionate rise of price in any other equally large mass of 

commodities Mr. Mill endeavors to show that demand and 

supply are always equal in the aggregate ; that an oversupply of some 
commodities must always be balanced by an undersupply of others ; 
and that therefore a general glut is impossible." (Rev. T. R. Malthus, 



INTEREST 229 

non-money economy, should one man lend to another man 
a cow? At the minimum, the payment, whether agreed to 
be made in terms of cows or in terms of other utilities, 

Definitions in Political Economy, London, John Murray, 1827, chap. 
on James Mill.) And Malthus rightly points out that Mill would be 
entirely correct here if demand meant nothing more than the amount 
consumed ; doubtless the entire product may be sold and be consumed at 
some price, but not necessarily at a price remunerative to the producers ; 
if nothing more is meant by Mill than to assert that consump- 
tion will equal production, "this .... is really no more than say- 
ing that if commodities were produced in such abundance as to be sold 
at half their costs of production, they would still be somehow or other 
consumed — a truism equally obvious and futile. But .... Mr. 
Mill .... observes, 'It is evident that whatever a man has pro- 
duced and does not want to keep for his own consumption is a stock 

which he may give in exchange for other commodities His 

demand is actually equal to the amount which he has produced and 
does not mean to consume !' " (Elements of Pol. Econ., sec. 3, p. 225.) 

But Malthus insists that hats and shoes may very well be selling 
against each other at the old ratios and yet both be selling at less 
than cost ; the question is merely whether this can be true for com- 
modities generally. "The hop-planter who takes a hundred bags of 
hops to Wighill fair, thinks little more about the supply of hats and 
shoes than he does about the spots in the sun. What does he think 
about, then? and what does he want to exchange his hops for? Mr. 
Mill seems to be of opinion that it would show great ignorance of 
political economy to say that what he wants is money ; yet .... 
it really is money that he wants and .... this money he must 
obtain .... in exchange for the great mass of what he has 
brought to market, or he will be unable to ' carry on his business as a 
hop-planter ; .... he must pay the rent of his hop grounds in 
money ; .... he must pay for his poles, his bags, his implements 

in money He must pay the laborers .... during the 

course of the next year in money, and . . . . it is in money and in 
money alone of all the articles brought to the fair, that he can calculate 
his profits." 

We may stop to note that Malthus is probably right here as to 
the actual psychology of the case ; people do look at things in this 
way ; and perhaps it does not matter to the argument whether or not 
they ought. But all the while, the precise question at issue is not 
entirely clear. Malthus says it is whether commodities generally may 
not be being produced at a loss to the producers. "True .... the 
landlords and laborers who are paid in money will finally exchange it 
for something else, as no one enjoys money in kind, except the miser ; 
but the landlord .... would be little inclined to accept from the 
planter the articles which he could get at the fair in exchange for his 

hops And as matter of fact the laborer .... is paid in 

money. 

"Foreign trade is no doubt mainly a trade of barter. But the 
question whether British woolens find an adequate market in the 
United States does not depend upon their purchasing the same 
quantity of tobacco as usual, but upon whether the tobacco or whatever 
the return may be, will purchase the British money or the British 



230 VALUE AND DISTRIBUTION 

would need be, to the lender, in view of all his circum- 
stances, of as great significance as the present cow, whether 
as immediate consumption good or as a production good to 
be kept in the possession of the owner. That is to say, the 

labor necessary to enable the woolen manufacturer to carry on his 
business successfully. If woolen and tobacco are both below the costs of 
manufacture in money or labor, both parties may be carrying on a 

losing trade This is an answer to the pamphlet which M. 

Say addressed to me some years ago. . . . The power of replacing 

capital will mainly depend on the power of commanding labor 

Commodities in general .... are continually rising or falling in 
money price .... while the money price of labor remains much 
more nearly the same. 

"The qtiestion of a glut is exclusively whether it may be general, 
as well as particular, and not whether it may be permanent as well 

as temporary What are the costs of production? They are 

either the amount of money necessary to repay the labor worked up in 
the commodity, and in the tools .... etc with the ordi- 
nary profits, etc or they are the quantity of labor in kind, 

etc Now surely it cannot be denied theoretically that all 

commodities produced in this country may fall in comparison with 
a commodity produced in Mexico. As little can it be denied theoret- 
ically that all commodities produced by British labor may fall in com- 
parison with that labor." 

Malthus makes no question that the glut will be quickly followed 
by reduced production, and appears to regard this as a fact of remedy 
rather than a second and aggravated stage of the disease. 

As Malthus has drawn the issue between himself and Mill, Malthus 
is clearly enough right ; wages and raw materials and contractual 
obligations do not keep pace in change with the course of general 
prices ; the phenomena neither of boom nor of post-panic depression 
can be understood excepting in the light of this fact. But the larger 
question whether, irrespective of costs' and entrepreneur profits, and of 
continuing entrepreneur activity, the production of goods may outrun 
temporarily the disposition to consume at no matter how low a price, 
is not touched by this discussion. Malthus, indeed, admits, as we have 
seen, that all the goods can and must find consumers. In other places, 
however, in order that entrepreneur profits be maintained, he recom- 
mends luxurious consumption as temporary remedy ; and it was upon 
this issue that Ricardo entered the lists. (See Bonar, Letters of 
Ricardo to Malthus, op. cit., pp. 188-90.) 

But upon the question whether present consumption may not be 
too greatly limited beyond the possibility of the savings being absorbed 
by social capitalization, and with a concurrent overemphasis upon the 
securing of representatives of reserved and postponed purchasing 
power — goods refusing to exchange against each other, but only 
against some form of long-time intermediary — this discussion throws 
no light. 

The problem of the relation of more liberal credit to the demand 
for goods, and of the relation of credit to speculative activity, and 
thereby to the general level of prices, is also really involved in the 



INTEREST 231 

loan must offer to the lender the promise of greater service 
to him than either of the other two methods open to him — 
consumption and personal exploitation. 

To the borrower likewise the question will present itself 

discussion. According to the usual view o£ the relations between 
demand and supply of products, demand and supply being regarded as 
merely different aspects of the same aggregate of goods, it is difficult 
to see how credit can be conceived, relatively to supply, as an 
increased demand or as an increase in the total volume of purchasing 
power. In this view of the case, expanding credit could have no bear- 
ing upon prices, no matter what might or might not be the effect upon 
interest rates — relations between present and future — excepting as, 
through the use of credit as substitute for money, the money com- 
modity is in effect made greater in supply. 

But if credit be regarded as expressing some modification in social 
attitude toward present goods and present consumption as against the 
future — an emphasis upon the present, with an enlarged disposition to 
promise heavily against the future, in order to have in the present — the 
case takes on a new aspect. And really speculation is nothing but the 
desire to have now, on terms of promise against the future, with the 
hope, it is true, that the future by its larger prices will justify, in 
terms of price gain, the hurry of acquisition. It is, in last analysis, 
an emphasis upon present goods, through present purchasing power 
in terms of money, as against future money or money credits. 

It is implied in all this, and needs be clearly accepted, that the 
purchasing power which is being offered against present goods is not at 
any time solely other present goods or the suspended purchasing power 
info which they have been converted. At all times future facts are a 
part of the present offer, and, as credit is varying in volume, are a 
fluctuating share in the total volume of offer. The granting of credit 
is really a method of making, out of putative future purchasing power, 
a present purchasing power ; the business of discount banking is 
essentially nothing but the underwriting of these undertakings against 
the future. The present purchasing power thus created thereupon 
becomes a part of the present money, or money equivalent, offering 
itself as demand against present goods. Two effects are manifest : 
(i) a rise in the rate of interest, that is to say, more favorable terms 
for present purchasing power as against future purchasing power, the 
new initiative being with the offers of future purchasing power ; (2) 
since future purchasing power is, through its credit representatives, 
functioning as currency, there comes about a modification in the 
exchange relations between the unit of currency and the commodities 
against which currency is being exchanged, that is to say, the level of 
prices is modified. 

But to return to our specific question — the social bearing of an 
unusually marked disposition on the part of producers and sellers to 
refuse to exchange present goods against present goods and to demand 
in exchange deferred rights of purchase — money-cash, credits, or well- 
secured promises ; it is clear enough that a generally lower price level 
must result ; but is it at all clear that this change in price level must 
succeed in marketing the goods in exchange for other goods, to the 



232 VALUE AND DISTRIBUTION 

in terms purely of service, of utility; can he obtain such 
terms of interest charge as to provide, after payment of the 
principal and its agio, a surplus of advantage? 

With the establishment of a money economy, the prob- 
lem remains the same in essentials; the calculus is still one 
of balance of utility. 

And in the more complicated industrial organization 
also, the entrepreneur is seeking a balance of utility for 
himself, although it is true that here the computation has to 
be worked out as the final summing-up and outcome of a 
series of market-price computations. The medium in all 

result of terminating the glut, and without enforcing a restriction of 
production? Or is it rather true that otherwise than so far as the 
new price level modifies the prevailing psychological attitude toward 
consumption, there must be, for a time, an adequate market for only 
those goods ministering to the more primary cla,sses of needs? 

The period preceding crisis is one of extremely high aggregate and 
per-capita productiveness of goods ; all productive energies have been 
fully employed, enterprise functioning at the extreme of pressure. The 
demonstration of this is convincingly found in the prevailingly high 
level of consumption ; with every wage-earner there goes the full 
dinner pail. Among the laborers there is taking place a higher average 
consumption of clothing, of minor comforts, and of luxuries. Not 
only this, but the social production has been sufficiently large to 
permit, over and above immediate necessities, the acquisition of a 
goodly amount of durable consumption goods — more and better 
personal belongings, books, pictures, household furnishings. Meanwhile 
also, in the more distinctly capitalistic field, it will be found that the 
social productiveness has made it possible, through saving, that there 
be constructed miles and miles of new dwellings and of business blocks 
— new streets with grading, paving, and sewers, and generally the 
extension of all sorts of public improvement, and the development of 
all kinds of quasi-public utilities. 

Of the farmer it can be said that never was his farm in better 
cultivation, his land so expensively and adequately drained and fenced, 
his herds so large, his barns so capacious or in so good repair, or 
his house so spacious or so well furnished. Turning to still more 
general conditions of accumulated wealth, it may be said that never 
were the factories so large or so well equipped with the different 
instruments and appliances of production ; and never were the ware- 
houses so large to receive the outpouring volumes of product. These 
prosperous years have, it is true, consumed largely out of their pro- 
duction, but at the same time it has been possible to construct and 
equip railroad systems spanning entire continents, and to have re- 
equipped all the systems earlier constructed. 

And how has it all been possible? Doubtless the ultimate explana- 
must be in the surpassing volume of production ; but within this, and 
made possible by it, was the enormous volume of saving. 

But how, under the existing economic organization, does this 



INTEREST 233 

the entrepreneur's computations remains a money medium; 
he must get money gain, but this in order finally to get the 
maximum of utility gain. He borrows present money 
against future money, or, more accurately, he borrows 
present purchasing power against the obligation of later 
payment according to the same standard. Hence the inter- 
est problem, as it presents itself in actual affairs, is the 
sale of present purchasing power, expressed in terms of the 
standard, against future purchasing power, expressed in 
like terms. As Galiani wrote a century and a half ago : 

Hence arise the kindred phenomena of exchange and interest, 
the one being an equation between money present and money distant 
in space .... in order to equalize the intrinsic value of the 
one or the other diminished by the lesser convenience or the greater 
danger. Interest is the same equation made between money pres- 
ent and money distant in time, time here operating in the same 
way as space.^ 

saving take place? Usually, as we have seen, through the restricted 
consumption of some individuals or classes in society, and the lending 
of this saved purchasing power — this loan fund — to others, mostly for 
the purposes of the creation of social capital. 

It is, then, the need of new railroads, new factories, new appli- 
ances, and new equipment that has furnished, and that alone could 
furnish, the market for new savings and the possibility that these new 
savings could express themselves in an increasing social capitalization. 
It is indeed evident that, if savings will not capitalize into forms of 
intermediate social wealth, there can be no market outlet fol the 
savings unless it be in consumption loans, that is, in class indebted- 
ness, dubiously secured, or in government wastes and government wars. 
We are, then, within reach of our conclusions : with the restriction 
of the disposition to consume, there is neither the market to absorb 
the productive output of society, nor even the market to employ the 
existing productive equipment ; capitalization cannot take place ; 
savings, in any considerable volume, become an impossibility because 
of no market for them ; there is nothing for the case but a sharp 
restriction of the productive output of society. A temporary lowering 
in the standard of living takes place ; meanwhile some tendency is mani- 
fest toward the displacement of labor through competing surplus-capital 
equipment, to the extent, that is, that the existing supplies of instru- 
mental goods are adapted to serve in relation to labor rather as substi- 
tutionary than as complementary goods. In large part, however, it is 
true that the existing capital goods are rather complementary than 
substitutionary in their technological relation to labor, and that hereby 
labor receives employment so far as the capital itself is able to find 
employment. 

^ Delia Moneta, Book V, chap, i, p. 243, quoted by Pantaleoni, 
op. cit.j p. 26. Pantaleoni, however, appears to be wrong in interpret- 



234 VALUE AND DISTRIBUTION 

The proposition that instrumental goods are productive 
in time needs no demonstration or elucidation, so far as 
concerns mere productivity by weight and tale; all instru- 
ments or agents of production — land and labor as well as 
machines and appliances — manifest their productivity only 
with time. 

But here, as we have seen, two problems are presented : 
(i) How infer that this weigh t-and-tale productivity is also 
a value productivity? (2) Why, if value productivity attends 
the instrument with lapse of time, is this value increase not 
reflected back upon the value of this instrument and 
expressed as part of the present value — the value increase 
thus disappearing by this very fact of absorption? 

I. Boehm-Bawerk's solution of this difficulty of proving 
concrete productivity to be value productivity, was merely 
to assert it as self-evident; there may, he admitted, be 
occasional cases where the increase in concrete product is 
more than offset by the effect of the increasing supply to 
depress the item price, but these cases are assumed — and 
thereupon declared — to be so far exceptional as to leave 
unimpaired the generalization that value increases with 
increasing supply. 

But again the inquiry presents itself — is the problem 
after all a question of value? and if so, in what sense? 
For all possible entrepreneur purposes the outcome is sub- 
stantially one of value increase, if only the later product 
exchanges for more money than did the earlier borrowed 
sum. It is, then, for entrepreneur purposes, necessary 
simply that the exchange power of money relatively to 
commodities in general have not changed; it must in such 
case be true that an increased number of items imports an 
increase in the aggregate price, if only the per-item price 
of the particular product has not especially suft'ered. If, 
then, the influence of technique, together with all other 

ing this passage as reducing the whole question of interest to the 
cause of contingency ; the aspect of lesser convenience might well be 
taken to include the deprivation of the use during the loan period. 



INTEREST 235 

co-operating influences bearing upon price, has been of a 
sort to leave the general price level undisturbed, a general 
increase in weight-and-tale output must attach a general 
price advance to the aggregate product. If there are 
exceptional industries where the aggregate price product 
suffers despite the increase in the number of items pro- 
duced, there must thereby be a still more marked price 
productivity for the remaining industries in the aggregate. 
Failure to manifest price productivity is thereby proved to 
be exceptional, and basis is established for the only kind 
of value productivity which at all concerns the present 
problem — the explanation of interest-offering under entre- 
preneur production. 

2. But why is the increase in price product not reflected 
back upon the price or value of the productive instrument 
itself, and expressed under the form of its increased 
present worth? 

The first answer is that it is so reflected. Even though 
an instrumental good may also be capable of use as con- 
sumption good, it cannot serve in both capacities at one 
and the same time ; the situation is one of alternatives. As 
production good the present worth is based solely upon the 
value of the future product, and is purely the resultant 
thereof. True, the cow may command $50 for immediate 
consumption as beef, or may bear a $50 value for dairy and 
breeding purposes ; but either aspect excludes the other. In 
the aspect of productive instrument, then, our problem 
formulates itself as follows : Why is not a fifty-dollar cow 
now worth fifty-five dollars, if only it and its increase will at 
the end of the year be worth fifty-five dollars? And this is 
merely to ask, why will not the cow now exchange for 
more of other things, if at the end of a year it will so 
exchange? It is, perhaps, answer enough for present pur- 
poses to say that the cow has today exchange relations 
against other things all of which, in their aspect of present 
purchasing power, have this same potentiality of increase. 

But it remains to ask, why have all present values the 



236 VALUE AND DISTRIBUTION 

same productivity in rate of increase? Some production 
goods appear to increase by only a fraction of themselves 
annually, cows, e. g., bringing forth young but once a year, 
while rabbits multiply ten or twelve times; and still other 
productive instruments bring forth some thirty and some 
sixty and some a hundred fold. Is the answer to be sought 
in the degree of dependence upon other productive influ- 
ences — the attendant higher expense in getting, e. g., the 
rabbit increment upon the market — or in the land and 
labor and implement outlays of maturing the highly multi- 
plying yield of grain? The facts, however, will hardly 
bear out this explanation; we shall rather have to refer 
ourselves to the greatly falling per-item price of the more 
readily multiplied commodities ; we must invoke the prin- 
ciple that entrepreneurs and entrepreneur capital will direct 
themselves into these mathematically attractive enterprises, 
until, with lowering prices in connection with the collateral 
costs and burdens, the purely mathematical advantages are 
fully offset. 

But even so, we have the necessity still before us to 
explain the general rate of price increment, that is, of time 
discount. 

Is it enough for this to show that, through technological 
influences, present price has the power to grow, at the 
actual rate of increase, into future price? Does, then, the 
long-continuing fall in the rate of interest indicate a slow- 
ing-up in the rate of weight-and-tale reproductiveness of 
instrumental goods, despite all the technological advances of 
these later years? Why is the rate of increase as it is, and 
why as low as it is? There is a suggestion here that some- 
how all lines of production that are markedly instrumental 
in their technique, have so suffered a price fall in their 
respective products that the weight-and-tale productivity 
of the instruments has been more and more absorbed under 
the guise of rising compensations to the co-operating pro- 
duction costs, interest suffering, we will say, to the 
advantage of wages. And if so, why has this taken place 



INTEREST 237 

to the precise extent that recent facts disclose? Need it 
ever stop? What influences are setting the Hmit? 

Let it be supposed to be today possible to foresee that 
each and every item of wealth in existence today will 
tomorrow, by its own inner necessity and activity, be repre- 
sented by two similar items. To assert that the one item of 
today would have the same value or price as two items of 
tomorrow would have but one possible meaning. There is 
no reason why the exchange relations obtaining today 
between different commodities, or between commodities 
and money, should be in any wise different tomorrow ; thus 
an item of today should buy the same amount of other 
items or of money as an item of tomorrow will buy tomor- 
row ; there are merely two items tomorrow for every one of 
today ; and two items of tomorrow must command of other 
commodities or of money twice as much as one item of 
today will command. 

Thus any question of equality of value or of price 
between today's situation and that of tomorrow can refer 
only to the exchange relations which must come to exist 
between the one item of today and the two of tomorrow, 
both being expressed in terms of the same system of 
exchange values. These relations must then be stated 
either (i) in terms of the present system, so that tomor- 
row's two items are discounted at the rate of 50 per cent, 
into present price, the bank-discount manner of statement; 
or (2) that today's items draw interest at the rate of 100 
per cent, in taking rank in tomorrow's system of price. 

In either case, items are transferred from one price 
system into the other only by virtue of the principle of 
interest agio, time discount. 

And in the case assumed, a case of no co-operating 
effort or pain or care, and of no outside instrumental 
co-operation — a case also in which all things, provisions, 
lands, machines, durable goods, everything, have doubled — 
the discount rate would be 50 per cent., or the interest rate 
100 per cent. 



238 



VALUE AND DISTRIBUTION 



But all this, while it may make clear the broad general 
principle and basis of time discount, leaves unsolved all the 
distributive difficulties inevitably to emerge as the various 
co-operating influences are found to have part in bringing 
about the increase in price product. And possibly enough 
we have some difficulties to consider in the very phenome- 
non of money price itself.* 

* Because, in the discussions to follow, the emphasis upon price 
as the peculiar and leading, if not the exclusively important, aspect 
of value, will become increasingly pronounced, there appears to exist 
the logical requirement, if not the practical necessity, of including 
within any general discussion of value an examination of the nature 
of money and a study of the process of price adjustment. To omit this 
appears to assume either (i) that monetary theory is so far a field of its 
own with its own peculiar difficulties and problems, as to render mone- 
tary doctrine impracticable of discussion here, and as to enforce, for 
present purposes, the uncritical acceptance of the generally received 
doctrines ; or (2) that monetary theory is, in its value aspects, so far 
at one with value theory in general, as reasonably to dispense with any 
special treatment. 

But even were this second view adopted, some justification for the 
adoption of it could fairly be demanded. The truth, however, appears 
to lie with the first assumption, that the problem of price would, if 
entered upon here, lead us in many directions over-far afield. Little 
more, then, can in this place be attempted than a summary statement 
of the grounds appearing to justify this view. 

The explanation for the relatively inelastic character of the 
money supply carries us over, on the one side, into the technology of 
gold production, and into the nature and degree of gold consumption ; 
on the other side, into the peculiar nature of the demand for money, 
and thereby into the recognition that, as Marx has put it, "Gold, 
when a mere commodity, is not money" {Das Capital, Book I, 
chap, iii, sec. 2). But in the purely supply aspect of the problem, 
it is perhaps true that no great difficulty need be experienced. 

It is on the demand side of the money-value investigation, and 
especially with reference to the nature and the basis of this demand, 
and with reference also to the interactions and adjustments between 
the demand for gold as commodity and the demand for gold as money, 
that monetary theory becomes at once difficult and controversial. 
Here credit influences present themselves for analysis — present, 
indeed, in the first instance, the problem whether they may not rightly 
rank rather as within the money-supply category than as within the 
demand-diminishing category. Here also the variotis quantity theories 
formulate themselves as issues — the relation and the reaction of credit 
on prices and of prices on credit, and the like. 

On the whole, therefore, a theory of value need not stand or fall 
with a theory of price, nor need a theory of price especially concern 
itself with the broader and deeper problems of value in general. Gold- 
value price, Geld-Preis, is an independent subdivision of the broad 



INTEREST 239 

But we have not yet finished with the nearer-lying diffi- 
culties on the demand side of the intereat equation. So 
much as this is already evident, that the preference for 
goods for present consumption, the abstinence or "per- 
spective" influence, as well as the demand for present 
goods for purposes of industrial or commercial gain, and all 
the preferences that run toward present goods by reason 



value field -and claims its place as separate subdivision precisely because 
it has more than enough of difficulties of its own. 

With this preamble of caution, of disclaimer, and of apology, 
some of the connections and some of the separations of value theory 
in general and price theory in particular may be noted. 

To money in its aspect of general purchasing power, and as 
symbol and equivalent of consumption goods, the principle of falling 
utility applies as a fact of the individual experience. But as inter- 
mediate, not to consumption, but to exchange, the principle does not 
apply. The more or less of the exchange medium in the possession of 
any individual, and the more or less of the exchange medium in society, 
and the general level of prices in society, are each and all irrelevant 
to the advantages derivable by the individual from the opportunities 
offered by exchange ; only goods in hand and goods wanted are essential. 
Thus, while, in a loose and general way, under the rich-man- 
poor-man comparison, the possessor of a large supply of any one com- 
modity, or of commodities, or of purchasing power in general, may be 
said, as compared with the respective utilities offered to the possessor 
of the smaller supply, to hold at a low marginal utility, no comparison 
of this sort is possible for money as intermediate of exchange. The 
ratio relation between the things to be had and the things to be fore- 
gone in the application of purchasing power exists for both men, and 
is the same ratio of equality for all marginal applications of purchas- 
ing power, but the absolute volume of the utilities compared in the 
computation of buying and foregoing are not to be known by the fact 
of exchange or to be even vaguely inferred from it. 

The principle that with any commodity successive increments of 
supply attach to lower and lower individual needs, and thus that, with 
each individual, successive increments of purchasing power afford 
per unit a smaller and smaller significance, and that thereby, in 
society as a whole, any increase in social dividend may be loosely 
and average-wise declared to take place only as subject to the law 
of falling marginal service, is in no part safely to be carried over 
into monetary discussion. The monetary need in society is not in 
general better served by greater supplies of media ; a principle of no- 
utility rather than of diminishing utility applies to every increase of 
money supply ; to society as a whole or in the average, it does not at 
all matter whether the level of prices be high or low — the supply of 
intermediates great or small. 

Thus while with gold as consumption good the principle of 



240 VALUE AND DISTRIBUTION 

of the uncertainty of life and by reason of the danger of 
objective loss, and all the demands resting upon changing 
human conditions and needs, have each their several share 
in determining the interest-agio adjustment between demand 
and supply. 

But it is now necessary to recur to the fact that capital- 
borrowing is not commonly a borrowing of instrumental 

diminishing utility applies, an entirely different principle must be 
accepted for the social significance of increasing gold as money. 

An increase in the general supply of purchasing power in society, 
as an attempted parallel to the effect upon the individual of an 
increase in his personal provision of purchasing power, could point to 
nothing in society but an increase in the total of goods to be exchanged 
— an increase in the aggregate demand and supply of products — and 
would thereby cease to be a monetary computation, in any other 
bearing than that of its relation to the quantity of intermediate 
purchasing power required by society. 

The marked inelasticity of the demand for money, as compared 
with other market facts, traces back to the peculiar nature of the 
service which it characteristically renders, and leads in turn to the 
solution of some of the most controversial of the problems connected 
with monetary theory. 

It is clear enough that division of labor is possible only upon 
terms of the possible exchange of products. Socially, then, an inter- 
mediate of exchange, a money, has all the significance that attaches 
to specialization of activity in society ; for while a considerable 
degree of this interdependence by specialization could be worked out 
under a system of barter, it is, as we have already seen, at the same 
time clear that not a lack of any medium of exchange, but a multipli- 
cation of media, would characterize the barter economy ; a money 
economy has arrived when the point is reached where one medium has 
come to be conventionally accepted in place of many media. 

The demand, then, for exchange media, or in modern society 
for an exchange medium, has behind it all the forces derivative from 
the advantages of specialized industrial organization. For each indi- 
vidual the significance of money expresses itself in the advantage 
accruing to him through his own opportunity to do the thing to which 
circumstance and aptitude direct him ; thus each exchange affords for 
him in some degree the advantage commonly designated as quasi-rent. 
The strenuous demand for an exchange medium finds, therefore, its 
explanation in the rent elements hidden in every transaction of trade. 
Thus all the advantages that accrue to individuals separately, and to 
society in the aggregate, through the assignment of tasks to faculty 
and to opportunity, and all the advantages attendant upon the law of 
increasing return, depend upon the existence of an exchange medium, 
and imperatively prescribe its exchange-permitting adequacy. 

And this leads us to the recognition of another aspect in which 
money differs from any other commodity ; other commodities have 
many and varied uses, and various grades of utility in each use ; so 



INTEREST 241 

goods but of purchasing power ; and this purchasing power, 
as we have seen, is directed, under entrepreneur super- 
vision and discretion, into all sorts of gainful avenues 
of cost outlay — land-labor, industrial appliances, advertis- 
ing, insurance, franchises, privileges, copyrights, patent 
rights, good-will, cutthroat competition, bribery, monopoly 
differentials of predation, etc. The competitive entre- 

also of gold as commodity ; but as money, all items perform the same 
function and perform it equally well ; gold as money has only one 
utility and one grade of utility. So, with other commodities, the total 
utility of the stock is indefinitely more than the utility of the final item 
(if there ever really were a social marginal utility) times the number 
of items ; with money the total utility is a simple product. 

It follows also from the nature of the money service that the 
level of prices is, for this purpose, entirely unimportant ; and it 
follows likewise that, whatever the money supply, the price level must 
adjust itself so as, in view of the volume of the money supply, to 
make possible the volume of exchanges to be effected. Restated, this 
means that, so far as production and the degree of productive speciali- 
zation may be taken as constants, there can be no change in the 
general price level otherwise than through a change in the volume 
of exchange media. This statement could doubtless be equally well 
changed to read that, with the supply of media remaining constant, 
changes in the level of prices can come about only through a 
change in the volume of the demand for the exchange medium. 

No detailed discussion will be needed here to show that credit as 
substitute for money may be treated either as an increase in the 
supply of money, or as a decrease in the demand for money. With 
this in mind, we are prepared for the further doctrine that a direct 
proportion holds between prices and the volume of exchange media ; 
this, indeed, follows necessarily from the fact of the homogeneity of 
the demand, and from the practically inflexible and inelastic nature 
of this demand. If with a change in the demand for an exchange 
medium, and with an inelastic supply of the medium, there could be 
no adjustment by a change in the price level, the alternative would be 
an adaptation of the commercial and industrial organization of 
society, as dictated by the inadequacy of the supply of media. For it 
is once again to be noted that the demand is none of it of a nature to 
be retired by a change in the price level ; only on terms of industrial 
disorganization and reorganization is this demand to be retired. 

The quantity theory of money runs, at its crudest, that the 
quantity of money metal in existence — or in circulation — determines 
the price level. This is obviously incorrect ; and it probably is also 
incorrect, if the proviso "other things being equal" be added. But the 
amended formula would hold were there no use for the money metal 
other than the money use. The inadequacy in the quantity theory, 
as commonly stated, is in its failure to allow for the influence of 
demands for the money metal other than the money demand, or in its 
assumption that the money use has somehow the power to dictate the 
bullion value in the non-monetary market. Opponents of the quantity 



242 ' VALUE AND DISTRIBUTION 

preneur concept of capital is the only one having relevancy 
here, purely because individual and not social productivity 
is the only productivity in question. 

Not only this : but the interest rate is determined in the 
purchase and sale market of the loan-fund form of capital. 
All the different demands for all the different present uses 
of all possible different kinds of present goods, and of 
rights to goods, express themselves as call for loan funds — 
unspecialised purchasing power. The supply of loan funds, 
the origin and amount of which yet await in some part 
their explanation, is the deferred-consumption volume 
turned into immediate and current purchasing power. 

The value of any instrument of production is the 
present worth of all the future incomes attributed to it, as 
computed under the time-discount rate established in the 
loan-fund market.^ 

theory are also prone to forget that there are two distinct demands — 
the money and the commodity demand, and to assume that the money 
value is a derivative from the value of the metal as established in 
the commodity market. But, in truth, both the industrial demand and 
the money demand concur in fixing the value which, supply being 
assumed, the money metal must bear. But it is none the less true that 
so much as is the exchange medium less so much the more must the 
exchange unit possess of purchasing power — that is, that so much 
the lower must be the price level. The quantity theory is then tenable 
in its assertion of proportionality, but fallacious in its tracing of the 
lines of causation. 

There is, indeed, no warrant for believing that gold as money gets 
its value from gold as commodity — or the reverse. The value of iron 
for nails is not reflected to it from the stove demand, any more than 
the value of flour for pie-crust purposes is the determinant of the value 
of flour in all other culinary processes. In no intelligible sense, then, 
can the volume of money in any one country, or in the world, be said to 
fix prices, or prices be said to fix the volume of money ; but both 
the level of prices and the local quantity of money are determined by 
the same influences, that is, are derivative from the world-level of the 
value of gold, as itself expressive of the adjustment between all the 
different demands for gold, on the one side, as over against all 
the supply of gold on the other side ; and by virtue of this common 
derivation, the value of gold used as money and the volume of gold 
so used are bound rigidly together. 

^ Professor Irving Fisher's admirable treatise upon The Rate of 
Interest appears as the present work is passing through the press. 

It will be remembered that Boehm-Bawerk defines interest as the 
premium commanded by present over future goods, and that he 



INTEREST 243 

No instrumental good — or, if one prefers the expres- 
sion, no capital good — will be produced, unless the future 

attributes this premium to three concurrent causes, (i) the per- 
spective underestimate of the future, (2) a possible relative scarcity 
of present goods as compared with future goods, (3) the technological 
productivity of wealth with passing time. 

Professor Fisher- — following what is seemingly Professor Fetter's 
view — adopts as his thesis that only the first two of the three influences 
set up by Boehm-Bawerk are properly to be invoked in explanation of 
the interest phenomenon : 

"It is the third circumstance — the so-called technical superiority 
of present over future goods — which we believe to contain essential 
error (p. 55). To abstract both the underestimate of the future and 
underprovision for the present is to abstract the whole basis of 
interest j(p. 55). If we eliminate the 'other two circum- 
stances' .... we eliminate entirely the superiority of present 
over future goods, and the supposed third circumstance of 'technical 
superiority' therefore turns out to be non-existent (p. 70). 
If we cast out from the agio theory Boehm-Bawerk's special feature, 
his alleged 'technical superiority of present goods,' the theory 
which remains is believed to be correct" (p. 74). 

Professor Fisher is not, however, disposed to deny to productivity 
some bearing on the interest rate ; but he insists that the influence of 
productivity is exerted solely through modifying the general situation 
within which postponement of consumption takes place ; it brings about, 
that is, a new abstinence problem, and does this solely through modi- 
fying the relative supplies of present goods as over against future 
goods: 

"It is also true, as Boehm-Bawerk has pointed out, that not only 
does a lower rate of interest tend to the choice of remoter returns, 
but that, contrariwise, the choice of remoter returns tends to check 
the fall in the rate of interest ; the reason .... being that the 
choice of an income-stream relatively large in the future and small in 
the present tends to increase the relative valuation of present as 
compared with future income (p. 164). 

"If any cause tends to lower the rate of interest, the immediate 
effect will be to put a premium on those income-streams the return 

from which is in the remote future But the decision to 

choose such income-streams tends to prevent the very fall in the rate 
of interest which caused the choice. For by relatively oversupplying 
the future with income, and undersupplying the present, such uses 
as forestry will tend to raise the relative valuation of present over 
future income, and therefore also to raise the rate of interest 
(p. 175)- 

"Nature offers man, as one of her optional income-streams, the 
possibility of great future abundance at trifling present sacrifice. 
This option acts as a bribe to man to sacrifice present income for 
future, and this tends to make present income scarce and future 
income abundant, and hence also to create in his mind a preference 
for a unit of present over a unit of future income (p. 186). 

"The effect in raising interest comes merely from the shifting 



244 VALUE AND DISTRIBUTION 

rents promised by it, when computed into present worth 
at the market rate of discount, equal, and thereby justify, 

forward of the income-stream, which leaves the immediate income 
smaller than before, but compensates for this by a still greater increase 

afterwards The rate of interest, for contracts connecting 

the periods of scarce income with those of plentiful income, tends so to 
be high (p. 199). 

"The deferred increase is expected to yield a return on the 
immediate sacrifice at a rate sometimes far greater than the rate of 
interest. But this high rate of return on sacrifice to the exploiter of 
the newly discovered method of utilizing capital does not by itself 
fix the rate of interest at that level. On the contrary, the valuation 
of the property is immediately adjusted to the new conditions" 
(p. 199). 

Thus we are to understand Fisher to assert that the use of any 
productive process or the use of any sort of productive wealth can 
exert an effect upon the rate of interest only through modifying the 
individual's estimate of the relative importance to him of present 
goods as against future goods. How shall the owner of an instrument 
of production, say, a farm, employ it — for farming? for forestry? for 
mining? 

"In the case of optional income-streams, the particular choice 
depends upon the rate of interest (p. 145). The intensiveness of 
his farming is thus determined by the rate of interest (p. 157). The 
choice will fall on the option whose marginal rate of return on sacri- 
fice, reckoned relatively to the neighboring option, is equal to the rate 
of interest (p. 158). Those investments which most promptly yield 
returns are formed first, and the less rapidly returning instruments 
are successively formed until the margin is reached which corre- 
sponds to the rate of interest A certain decrease of present 

income will be accompanied by a certain increase in future income. 
The relation between the immediate decrease and the future increase 
will vary within a wide range, wherein the choice will fall at the 
point corresponding to the ruling rate of interest (p. 159). The 
intensity with which he will improve and cultivate his land is deter- 
mined by the current rate of interest" (p. 161). 

That this correctly sets forth the attitude and the computations of 
the individual operator is past question ; but is there not at the same 
time some influence exerted to modify the rate of interest — and, if 
so, how? Does each productive instrument merely receive its value 
from an interest rate elsewhere and otherwise determined? 
Or do productive instruments themselves, as an aggregate, 
through the very fact of the productive opportunities which they 
offer, have an effect in determinirfg that interest rate under which 
each is separately capitalized ? And do new processes, inventions, 
and appliances somehow bear to affect the rate? 

"All preference for present over future goods resolves itself, 
in the last anaysis, into a preference for early enjoyable income over 
late enjoyable income (p. 90). When any other goods than enjoy- 
able income are considered, their values already imply a rate of inter- 
est. When we say that interest is the premium on the value of a 



INTEREST 245 

the requisite investment of present purchasing power. 
And Hkewise, as will be readily seen, any existing instru- 

present house over that of a future house, we are apt to forget that 

the value of each house is itself based on a rate of interest 

Both terms of the comparison involve the rate of interest 

But when present ultimate income is compared with future ultimate 
income, the case is different, for the value of ultimate income involves 
no interest whatever (p. 91). 

"The rate of interest expresses a price in the exchange between 

present and future goods Time-preference is the central fact 

in the theory of interest" (p. 88). 

True, "not only does a lower rate of interest tend to the choice 
of remoter returns, but, contrariwise, the choice of remoter returns 
tends to check the fall in the rate of interest" but the reason is 
stated as being "that the choice of an income-stream relatively large 
in the future and small in the present tends to increase the relative 
valuation of present as compared with future income" (p. 164). 

Here, then, is the issue : Fisher does not dispute the doctrine of 
Boehm-Bawerk that the newly opened lands, newly invented appli- 
ances, newly devised methods, have a bearing to raise the rate of 
interest, but only that the productivity fact is a separate and inde- 
pendent cause of interest ; he ascribes the influence of productivity 
solely to its effect upon the relative importance attached to present 
and future goods. Larger opportunities for profitable investment 
are presented as having ultimate bearing upon the rate, not by using 
up the supplies of capital or by increasing the volume of the demand 
for capital, but solely by limiting the present supplies of consumption 
goods at the same time with increasing the supplies of future goods, — 
and thereby increasing the premium of present goods over future 
goods : 

"The lower the rate of interest, the better can the owner afford 
to keep his carriage in repair, and the higher the state of efficiency in 

which it and all other instruments will be kept The very 

attempt .... tends in turn to increase the rate of interest ; for 
every repair means a reduction in present income for the sake of 
future — a shifting forward in time of the income-stream — and this 
will cause a rise in the rate of interest (p. 195). 

"The effect in raising interest comes merely from the shifting 
forward of the income stream, which leaves the immediate income 
smaller than before, but compensates for this by a greater income 

afterwards The high rate of return on sacrifice to the exploiter 

of the newly discovered method of utilizing capital does not by itself 
fix the rate of interest at that level. On the contrary, the valuation 
of the property is immediately adjusted to the new conditions 
(p. 199). 

"Since the invention will* more than repay this cost .... 
the effect will be to decrease immediate and increase remote income 
for society as a whole. Borrowing and lending merely distribute the 
pressure upon those most willing to bear it ; but the effect is .... to 
cause a temporary depression followed by an ascent in the income- 



246 VALUE AND DISTRIBUTION 

merit, whether land or other, the upkeep of which costs 
more in newly invested or in reinvested purchasing power 

stream, and therefore to increase somewhat the rate of time-prefer- 
ence and the rate of interest (p. 200). 

"Society .... directs its labor to great engineering enter- 
prises .... which cannot be in to contribute a return in enjoyable 
income for many years. In contemplation, future income, during this 
period, is relatively plentiful, and in consequence of these 'great 
expectations,' the rate of interest will be high" (p 203). 

There is, then, it will be noted, no denial made by Fisher that the 
productivity of wealth has an effect upon interest rates — that it is 
a cause — ^but only a denial that it is a separate and independent 
cause. The issue is, then, only as to the sense in which it is a cause, 
and as to the method of its action : if one shifts a weight from one 
side of the scales to the other, the tipping of the scales may certainly 
be said to be caused by the shifting of the weight, — but it may also be 
rightly asserted that this is only through the disturbance of the rela- 
tion between the two weights. And by reasoning precisely parallel 
it has been said that a new supply of any commodity has no effect 
upon price, simply because — once the supply is present — the adjust- 
ment becomes purely a matter of the nature and volume of the 
demand. 

If this, then, is really the issue, one might stop to ask himself, 
what of it — -supposing it all to be true ; is the issue really worth 
while ? 

But is it all, indeed, true ? Could not the reproductive power of 
wealth establish an interest rate even "if we eliminate the other 
two circumstances" ? After all, is "the supposed third circumstance 
non-existent" ? Is it true that "the imagined, third circum- 
stance .... is only the first two circumstances in disguise" ? 

Surely, (i) the perspective underestimate of the future may 
suffice to place a premium on present goods : and surely also (2) the 
relative scarcity of present goods as compared with future goods 
would also equally well suffice to bring about this premium : but how 
about the reproductive power of capitalistic processes as an inde- 
pendent cause? 

Let it be assumed, as an extreme test case, that present needs 
and desires are so far weak or so far satiated as to approach the limit of 
non-existence or of disappearance, — a situation in which, by the very 
terms of the assumption, there can be neither any "prospective under- 
estimate" of the future, nor any degree of inadequacy in "present pro- 
vision," — there being in fact no desire for present consumables, but 
only a clear appreciation of the certainty of tomorrow's need. If now 
it be clear that, for each unit of the existing wealth of today, there 
may by tomorrow be derived two units for tomorrow's consumption, — 
is it not certain that there will forthwith set in a vigorous competitive 
bidding for control of the present facts offering a command of 
tomorrow's consumable goods, and that there must result an interest 
rate approximating to 100 per cent, per day? 

It is extremely difficult to decide how far and in what sense 



INTEREST 247 

than the present worth of the future increased returns 
which are attributable to the upkeep to be appHed, will 

Fisher concurs in Boehm-Bawerk's assumption that comparison is 
possible in competitive society between goods in the present and 
goods in the future. Most of Fisher's analysis proceeds upon the implied 
assumption of this possibility : "Could it always be assumed that the 
monetary standard was invariable in value with reference to all 
goods, the rate of interest reckoned in money would be the same 
as though it were reckoned in terms of the goods themselves" 
(p. 78). But even were it accepted that the comparison is possible, 
Professor Clark long ago made it clear that in the market transactions 
of a competitive society the comparison does not actually take place. 
And it is equally clear also that neither borrowing nor paying com- 
monly takes place in terms of any concrete goods — whether farms or 
machines or raw materials or consumables. The borrowing runs in 
terms of present purchasing power according to the established money 
standard ; and the future settlement is agreed to be worked out in like 
terms. The contract and all the operations under it sound purely in 
terms of price, precisely as the gain in contemplation by the entre- 
preneur is computed as nothing else than a balance in terms of 
price. And no other computation is of the slightest significance to 
him — unless, possibly, as somehow derivative from the price gain 
which he is engaged in seeking. The interest problem is, then, not one 
of surplus value, or of surplus consumption goods, or of surplus 
future income, but only of surplus price. Only so far as surplus 
goods bring surplus price can surplus product of any sort stand as 
relevant to the computation. 

For the purposes of the interest problem, therefore, anything is 
productive which, in the actual situation of the entrepreneur, makes 
for a price-increment for him. The computation has to do solely 
with productivity as interpreted from the individual-acquisitive point 
of view. The borrowing is of a fund of purchasing power. This 
purchasing power may, truly, be directed into machinery, farms, or 
raw materials, — into lines, that is to say, of technological and 
social productivity, — ^but so, equally well, may it not. Instead, 
it may go into buying the right to levy taxes, or to enjoy a 
monopoly, or otherwise to plunder society ; or the borrowed fund 
may be invested in bribing the city council to grant a desirable 
franchise, — or into advertising expenditure, as a process of indoctrinating 
the public with profit-rendering Hop-Bitters or Peruna misinformation. 
In any case, if the adventure promise a return in price-increment, it 
will contribute to the demand for loanable funds, and, as based upon it, 
there may emerge an interest rate. 

And from aspects of distributive theory mostly to be presented 
later (see chap, xxvi), something may now be deduced for the pur- 
poses of the interest problem. Even where the borrowed funds are 
used by the entrepreneur in the purchase or hire of instruments of 
production, his problem remains precisely the same problem of how to 
get out of the future price-result a price balance over the price outlay. 
Enough of purchasing power must be advanced for labor to divert it 
from ministry to other demands — whether the consumption demand 
or the demand of some competitor, — enough for machines to get them 



248 



VALUE AND DISTRIBUTION 



fail of receiving the upkeep :*^ The degree of improvement 
depends upon the rate of interest. 

And now what shall be said of the view especially 
championed by Wieser, that for a complete theory of inter- 
produced for the purpose, — and enough for land to command its 
service ; and in connection with this investment there goes the entre- 
preneur's own activity of supervision and co-operation. When the 
time arrives for computing the gains upon the adventure, there is no 
way of attributing a certain quantum or proportion of the price result 
to the labor hired, or to the funds advanced for the labor, or any 
certain other amount to the machinery hired, or any third amount to 
the land employed ; nor is it possible even to attribute any certain sum 
of acquisitive productivity to the aggregate of the borrowed funds. 
All that the entrepreneur can know is that by employing the borrowed 
funds or their proceeds in connection with his own activity, and 
very possibly also in connection with funds or instruments of his 
own, this new borrowing could be made so to signify to him in terms 
of price-increment as to justify the promise to pay a price-interest 
increment. The rate of time discount, therefore, is a rate fixed and 
determined in the loan-fund market ; all properties — instrumental 
or other — that command a hire receive a value through the applica- 
tion of this interest rate to the computation of the present worth of 
these hires. 

" Classical doctrine teaches that the payment of land rent does 
not condition the existence or the maintenance of the land as pro- 
ductive instrument ; the rental payment having thus no bearing upon 
the supply of instruments, can have no significance for the supply of 
products, and thus no significance for the value of those products ; 
rent is thus held to be a price-determined fact — a result rather than a 
cause, — a distributive share which is not at the same time a cost, in 
that sense in which the other distributive shares are costs. 

Marshall faced and accepted the logically necessary inference 
that no hire of any produced instrument of production can be regarded 
as a price-determining cost, excepting under a time computation long 
enough to allow a change to take place in the supply of instruments, 
as the result of the divergence of compensation from cost ; and that 
for short periods capital-goods rents must be treated as, for cost pur- 
poses, exactly like land rents. 

We are not just now called upon either to accept or to reject this 
view, but only to examine the relations of land instruments and rental 
outlays to problems in the shifting and incidence of taxation. 

It is clear that a tax shifts only so far as, by the imposition of the 
tax,— through its effect upon the relative supply of instruments, the 
relative costs of production, and the relative volumes of products 
exchanging against one another, — modifications are necessitated in the 
exchange relations in the market ; shifting is a problem in value. 

If, for example, certain kinds of productive instruments are taxed, 
or if capital investments in a certain line of production are taxed, a 
change in the supply of these instruments, or in the volume of capital 
investment, will be brought about ; the redistribution of capital applica- 
tions may be slow or may be rapid, according to the degree of mobility 



INTEREST 249 

est there is necessitated an investigation of the distribu- 
tion-imputation process under which the rate of interest, 
together with all the other distributive shares accruing 
under the productive process, is supposed to be determined ? 

in the particular case ; even if the instrument or other capital have no 
alternative application by immediate change of use, it is certain that 
with time, through the gradual process of wear-out and deprival of 
upkeep, the capital shifting is none the less inevitable ; the supply of 
products must diminish with the progressive diminution in the supply 
of instruments ; the result must express itself in an enhancement of 
price to consumers. 

As to land, the traditionally accepted doctrine is excellently set 
forth by Carver in the following: "All goods excepting land are 
perishable and reproducible while land is not .... an important dis- 
tinction, since this limits their value to something approximating their 
cost of production, whereas there is no such limit to the value of 
land. These distinctions are important because important conclusions 

as to public policy depend upon them A tax on land, to take 

a single example, has a different effect from a tax on an article which 
is being produced, worn out, and reproduced by human effort. A tax 
on the latter class of articles has the effect of discouraging that effort 
and, consequently, of reducing the supply, v/hereas a tax on land does 
not affect the supply in the same way nor to the same degree," — Dis- 
tribution, p. 129. 

It is, however, clear enough that, if land values are subjected to a 
higher rate of tax than are other investments in productive instru- 
ments, a shifting of investment will take place as soon and as far as the 
nature of the case leaves it possible. The only questions are as to how 
soon and how far this possibility can manifest itself. It is clear also 
that in fertility aspects the original environment is capable of exhaus- 
tion in full parallel with produced instruments of production, and by 
the same method if upkeep is withheld. Practically all agricultural 
districts in New England testify to this fact ; nothing about land is 
indestructible excepting its location. 

It is apparent, then, that the "Single Taxers" have been grievously 
misled through an uncritical acceptance of the classical rent theory. 
They make shipwreck against the certainty that to subject the unearned 
increment to their tax program is inevitably to drive this unearned 
increment out of existence, or, more accurately, to force its transfer 
into a non-land form of holding — to render food and raw materials 
dear through the diminution of the social equipment for the supply of 
these goods. 

But while, as applied to fertility differentials, all this appears to 
be past doubt, the argument as it applies to the mere fact of location, 
and to differentials of transportation, is not quite so satisfactory or so 
self-approving. 

The truth is however, that unless fertility and location differentials 
are separately appraised and separately burdened in point of taxation, 
the tax upon location will have precisely the same effect to stimulate 
the exhaustion of fertility as if the tax were directly imposed upon the 
fertility. The land stands as a value aggregate of fertility and of 
transportation differentials ; value will continue to be substracted from 



25© VALUE AND DISTRIBUTION 

Or what shall be said as to the proposition — perhaps 
commonly regarded as identical with the foregoing, and pos- 
sibly rather intended by Wieser, — that a complete interest 
theory requires an investigation and elucidation of the 
distribution-imputation process under which the rentals and 
hires of the various classes of instrumental goods and 
agents are determined? 

The replies must be as follows : for all co-operating — 
that is, complementary — production facts, whether ma- 
chines of various sorts, laborers of various grades and 
kinds, lands of differing capacities and adaptations, patents, 
franchises, trade secrets — all such items as enter for the 
individual advantageously into the productive process, 
whether the product be hats, or shoes, or bonds, or salable 
notoriety, or marketable slander, or office, or place, or influ- 
ence, or pictures, or acting, or preaching, for all of these 
gain-producing agencies there is everywhere the problem 
of the value distribution of the joint product — a problem 
too difficult to be entered upon here; but this is not the 
interest problem; it is the problem of rentals, hires, and 
wages, whenever paid, and without necessary reference to 
their possible reduction into a present worth. 

Confining ourselves for the present to the observation 
that all of these rentals facts, if not of present payment, 
are themselves subject to the discount rendering into pres- 
ent worth, we turn to what is, for immediate purposes, the 
surpassingly important fact, that all these rentings, and 
hirings, and purchasings of instruments, or of labor, or of 
any possible sort of cost fact, enter into the cost computa- 
tion of the entrepreneur solely under the capital denomi- 

the land up to the limit that the "skinning" process can be carried — 
so long, that is, as by wear-out and refusal of upkeep, the slow market- 
ing of the land by the process of exhaustion remains possible of further 
extension. Where, as with urban values, the land differential is entirely 
one of location, there is no serious theoretical impossibility in the 
single-tax program, if only the distinction between ground rent and 
improvement rent is faithfully observed. For precisely parallel reasons, 
it is imperative with agricultural land to preserve the distinction 
between differentials of location and differentials of fertility. 



INTEREST 251 

nator; but they nevertheless enter in two aspects: (i) ac- 
cording to the quantum of direct expense; (2) according to 
the time at which the expenditure is made relatively to the 
time of cash marketing. And this amounts to saying that 
so far as the expenses of production are technological in 
character and are to be ascribed to the mechanical factors 
in production, these expenses as capital charges are to be 
computed not in terms of rent, interest, wages, and profits, 
but of (i) instrument hires — rentals, (2) wages, (3) 
profits, and (4) time discount, interest, upon the particular 
outlays under consideration. But it is still to be kept in 
mind that these categories of cost^, like the discarded cate- 
gories, fall far short of including all cost outlays ; and 
upon each of these other outlays, there is, or may be, an 
interest charge to compute as within the total of entrepre- 
neur-capital cost. 

For Crusoe the problem of balancing the protest against 
postponement of consumption against the advantages 
obtainable through postponement, could offer no great 
theoretical difficulty; the pressure of present desire must 
find in varying degree its justification or explanation, (i) in 
the prospect of relative plenty or want; (2) in the uncer- 
tainty of life; (3) in the prospect of greater or less inten- 
sity of life and desire, with the passing of the years ; (4) in 
the sheer lack of capacity adequately to appreciate in the 
present the needs of the future — all these influences sum- 
ming up to explain the relative estimate of present need to 
future need. On the objective side, there are the prospects 
and openings for productive employment, and the hazards 
of partial loss or total loss. The limit upon saving is at the 
point where advantages and disadvantages are regarded as 
at equilibrium. 

In competitive society, the holder of wealth or of rights 
to wealth or of rights to service has not merely the three 
options open to Crusoe, to exploit, to hold, to consume; he 
has a fourth possibility, to lend; and from his personal 



252 VALUE AND DISTRIBUTION 

point of view, only the third option is to be regarded as 
non-productive ; all the rest are productive ways of holding 
present wealth over for acquisitive ends. Whichever one 
of these three productive methods offers the highest induce- 
ments will be selected, provided only that it is of sufficient 
weight to overbalance the claims of immediate consump- 
tion. 

On the side of borrowers a provision of present wealth 
or of present purchasing power may be desired either for 
purposes of consumption or of some sort of gainful employ- 
ment of the borrowed fact. But for both borrowers and 
lenders, the problem, while worked out in terms of stand- 
ard and of price, is in ultimate analysis a calculation of 
present utility against future utility : from no point of view 
is it, in any other sense than this price sense, a problem of 
value. The borrower, as producing entrepreneur, can pay 
an increase, reckoned in the price standard, if, by the aid 
of the loan, he can become able to put upon the market 
goods salable at an increase of price over what his product 
without the loan would have sold for; he cannot have the 
present purchasing power, or present wealth in terms of 
purchasing power, unless upon terms of this payment. The 
problem as thus restated is, then, precisely like any other 
problem of market price where buyers and sellers are many 
on both sides of the market, only that in the interest prob- 
lem the point of price adjustment — the equilibrium point — 
is a rate per cent. Detailed analysis of the process by 
which this, or any other, price adjustment is reached, must 
be postponed to a later chapter (see chap. xxv). 

But there still remains the difficulty of formulating the 
precise relation of technological productivity to the interest 
rate. 

It has become sufficiently evident that technological pro- 
ductivity would alone suffice to explain the time-discount 
phenomenon; but so might also the "perspective" fact be 
sufficient, if only the demand for present consumption out- 



INTEREST 253 

ran the loan supplies derivative from the reverse per- 
spective. 

But, in point of fact, the saved purchasing power in 
society goes not solely to supply the entrepreneur demand ; 
it directs itself sometimes into the immediate substituted 
consumption of the borrower; or results in the borrower's 
providing himself with increased durable consumption 
goods ; or, again, in the financing of public improvements, 
or of deficits of administration; or, still again, in indebted- 
ness for the wastes and orgies of war. 

And even when the demand in question is an 
entrepreneur demand for entrepreneur capital, there 
is no warrant for supposing that in any case, 
all, or, in all cases, any of the borrowed funds 
must be devoted to the increase or even to the upkeep 
of instrumental goods. The quest of the entrepreneur is 
purely one of private gain; his ends may, it is true, be 
attained through socially productive activity, by contribu- 
tion to the social dividend, but equally truly, and equally 
commonly, these ends are otherwise sought. Private acqui- 
sition is the only productivity involved. Merchandising of 
consumption goods is clearly enough, in present society, a 
socially productive activity, irrespective of all question of 
the degree of the productivity or of the possibly associated 
wastes; but it is not so clear that either the production or 
the underwriting or the merchandising of every sort of 
corporate stocks is as socially productive as it may be 
acquisitively gainful. So the uprearing of business good- 
will through advertising, and the establishment of monopoly 
through the outlays and the temporary losses of cutthroat 
competition, are gainful investments of loan-fund capital. 
So the right to levy tolls is a capitalizable fact, and may be 
originally procured on terms of capital outlay. Interest 
rates may be in part supported, and might be entirely so, 
by the investment opportunity offered under the system of 
tax-farming, or by the sale of monopolies in foreign trade. 
Election contributions are often decided to be a profitable 



254 VALUE AND DISTRIBUTION 

line of investment of business capital. If by the mere 
power of size attaching to great aggregations of capital, 
the right of highway robbery, or of railway robbery, or of 
public-contracts robbery, could be controlled, a very consider- 
able rate of interest agio might rule without any slightest 
taint or alloy of socially productive service in any capital 
use. Other distributive shares in society would doubt- 
less have to pay for it all, but the revenues accruing to 
postponement would be none the less actual. 

In point of fact, however, technological productivity 
has a part, and, it may be, quite the larger part, in account- 
ing for business gain from the use of capital. But for 
theoretical purposes the only emphasis is upon the point 
that the question is one purely of entrepreneur gain through 
the possession of entrepreneur capital, and not at all of the 
particular method by which the gain is achieved. 

Were it possible accurately or even approximately to 
determine in what degree the emergence of a commodity 
product at the end of its series of production and market- 
ing processes is due to technological productivity, the rela- 
tion of technological productivity to interest would be a 
deal clearer than it actually is. But that all the mechanical 
processes are completed leaves the commodity far from 
having been completely "produced ;" all the various items of 
general-management cost, of taxation, of advertising, etc., 
remain to be computed; and under the actual conditions of 
business organization, a fairly definite proportion must be 
maintained between each of these lines of expenditure and 
the direct expenditure in concrete instrumental processes. 
The relation between these different lines of expenditure is 
that characteristic of interdependent complementary pro- 
cesses, no one of which is more imperatively required than 
any other; the process is an aggregate, a complex, and the 
share, which, as hire, the instrumental good derives from 
the result, is the share which entrepreneur competitive bid- 
ding attributes to it, in view of the effectiveness of the 
instrument in point of technique, of the nature of market 



INTEREST 255 

conditions and market methods, and of the relative attract- 
iveness of other than technological lines of productive 
expenditure. Not far from two-thirds of the retail selling- 
price of coffee today is due to the expensiveness of the 
competitive methods of marketing. 

Thus, were productive processes more markedly tech- 
nological, the interest rates upon any given volume of capi- 
tal employment might be higher ; but it is, perhaps, equally 
true that the present volume of saving capital could hardly 
be employed, at the present level of development in tech- 
nique, in purely technological lines; the widening field of 
investment in non-technological production processes 
explains in large part the elasticity and the extent of the 
demand for capital under present conditions, and explains 
also the fact that the interest rate has not come under the 
necessity of a greater fall.'^ 

^Professor Veblen argues (Theory of Business Enterprise, chap, v) 
that the growing employment of credit by individuals and by business 
concerns, though it increases the volume of business in terms of price, 
cannot, in view of competition, increase appreciably, in the long run, 
the aggregate profits of business, and cannot appreciably enhance the 
aggregate industrial equipment or the aggregate industrial output ; all 
competitors being compelled, through competition, to extend their use 
of credit, no advantage can accrue to them in the aggregate ; the added 
funds not going appreciably to the provision of increased industrial 
equipment, the aggregate social product is not expanded ; "all these 
advances go to increase the 'capital' of which business men have the 
disposal ; but for the material purposes of industry, taken in the 

aggregate, they are purely fictitious items Ftinds of whatever 

character are a pecuniary fact, not an industrial one ; they serve the 
distribution of the control of industry, not its materially productive 
work." (P. 104.) 

As to the tendency of the forces under consideration to bring 
about a progressive consolidation of enterprises, there need, seemingly, 
be little doubt ; but that while the number of business units is 
decreasing there can be no appreciable increase in the per-unit profit 
is not so clear. But is there really an increased aggregate of credit, 
or is the fact simply that the larger organizations have merely displaced 
the smaller in the use of a practically unchanged volume of credit? 
Is there any reason to assume that the aggregate capital investment 
has, through credit, been increased, and this without corresponding 
increase of entrepreneur gains, and that, on the contrary, the enlarged 
employment of capital, without enlarging returns, has necessitated 
an actual fall in the interest rate, though possibly not a fall in the 
absolute quantity of interest outlay? 

But for the most part, Veblen does not assert a fall in the rate 



256 



VALUE AND DISTRIBUTION 



It will now be profitable to sum up these interest conclu- 
sions so far as they are of inmiediate relevancy to the 
course of the argument. 

The discount rate, the interest agio, should, in analogy 
with all other cases of market adjustment, coincide approxi- 

of interest, but only a decrease in the rate of profit, as computed upon 
the basis of the total business transacted by the entrepreneurs and 
upon the total volume of "capital" in hand, inclusive of credit exten- 
sions ; and he appears to account for the larger employment of 
"capital" chiefly by the fact that the productive intermediates are 
enhanced in price through the competitive bidding of the competing 
entrepreneurs : "Loan credit .... taken in the aggregate serves 
only to widen the discrepancy between business capital and industrial 
equipment. So long as times are brisk this discrepancy ordinarily goe.= 
on widening through a progressive extension of credit. Funds obtained 
on credit are applied to extend the business ; competing business men 
bid up the material items of industrial equipment by the use of funds 
so obtained ; the value of the material items employed in industry 
advances ; the aggregate of values employed in a given undertaking 
increases, with or without a physical increase of the ■ industrial 
material engaged ; but since an advance of credit rests on the collateral 
as expressed in terms of value, an enhanced value of the property 
affords a basis for a further extension of credit, and so on." — 
Ibid., pp. 104, 105. 

"The nominal magnitude (value) of the earnings is not increased 

in as large a ratio as that of the business capital The funds 

obtained on credit are in great measure invested competitively in the 
same aggregate of material items that is already employed in industry 
apart from the use of loan credit, with the result that the same range 
of items of wealth are rated at a larger number of money units." — 
Ibid., pp. 108, 109. 

But in any case, the rate of interest does, after all, in Veblen's 
view, appear to be pushed toward fall through an overvaluation of the 
intermediate goods finally resulting from their constantly expanding 
market prices : "A manifest discrepancy presently arises .... 
between the aggregate nominal capital (capital plus loans) engaged in 
business, on the one hand, and the actual rate of earning capacity of 
this business capital, on the other hand" (p. 107). It is "unavoidable" 
that "credit expansion is in some degree 'abnormal' or 'excessive.' 
Such a use of credit does not add to the aggregate of industrially pro- 
ductive equipment, nor increase its material output of product, and 
therefore it does not add materially to the aggregate gross earnings 
obtained by the body of business men engaged in industry, as counted 
in material terms of wealth or of permanent values ; it diminishes the 
aggregate net profits .... as counted in such terms, in that it 
requires them to pay interest, to creditors outside of the industrial 
process proper, on funds which, taken as an aggregate, represent no 
productive goods, and have no productive effect ; there results an 
overrating of the aggregate capital, engaged in industry, compared 
with the value of the industrial equipment at the starting point, by 



INTEREST 257 

mately with some fact of marginal sacrifice; and so 
it does. Abstinence is here one of the items of cost in the 
sense that the present volume of saving, or some part of it, 
will take place only on terms of the present level of com- 
pensation. The cost of any supply item, be it remembered, 
is merely the money statement of the resistance to be over- 
come in order that the item in question shall offer itself 

approximately the amount of the aggregate deposits and loans on 
collateral." — Ibid., p. 112, 

The fundamental error in all this — if error there be — rests in 
Professor Veblen's confusion of bank credit with loan fund. 

We have already seen that the banking function is merely the 
underwriting of the customer's credit ; banks do not lend their 
deposits ; the very existence of this deposit liability is, indeed, the fact 
by virtue of which the bank is limited in its further underwriting 
activity. The bank does have an important influence in aiding the 
process by which loan funds, in the form of its deposit liabilities, 
come into existence ; but the only possible lenders of these are the 
holders of them. The lending of them is a lending of suspended 
purchasing power ; they are a part, and a very considerable part, of the 
great loan-fund supply. This aggregate loan-fund supply furnishes, 
in the modern business organization, the basis of the process through 
which private savings work out into social capitalization. 

Mostly by means of the borrowing of loan-fund capital, and to 
small extent or not at all by appeal to bank credit, is the aggregate 
industrial equipment augmented. Short-time loans are not practicable 
for this purpose. Loan-fund borrowing is the true borrowing of 
"capital" in the business and financial sense. But it must be admitted 
that a goodly share of this typical capital flows, under entrepreneur 
management, into gainful processes — entrepreneur-wise viewed — that 
are not at all gainful as socially viewed — flows, for example, into all 
sorts of competitive expense for attracting trade, into extravagances 
of location, housing, and furnishings, into larger investment in sales- 
men, advertising, variety and size of stocks, and some of it, doubtless, 
into the competitive bidding up of the prices of the existing volume of 
intermediate goods, whether instruments or raw materials. 

Bank borrowing, on the other hand, is a mere issuance of the 
bank guarantee, its indorsement, in support of the customer's under- 
taking to pay, otherwise non-current ; this suretyship transaction is 
worked out under the guise and ternjinology of capital and interest 
methods. 

This distinction between bank guarantee and ordinary loan-fund 
borrowing may well occasion perplexity. It is, indeed, true that the 
bank customer may use his bank balance, acquired by discount, 
precisely as he uses the bank deposit credit assigned to him by the 
loan-fund capitalist. The difference is in the fact that in substance the 
credit apparently advanced by the discounting bank is really advanced 
by the person who accepts the customer's undertaking as guaranteed 
by the bank, and upon this undertaking and guarantee makes advances 
to the bank customer. Credit is, it is true, here obtained by the bor- 
rowing customer, as truly as in the other type of loan, but it is a 



258 VALUE AND DISTRIBUTION 

upon the market. Thus many items of the capital supply- 
may have no cost price ; some saving would take place with- 
out pay; and it is possible that some part of each man's 
saving would not take place except for the pay. But in any 
case, each different volume of supply has its different 

credit from some one other than the bank ;' the bank stands as mere 
underwriter of the credit relation. 

Thus under this form of credit obtained by the customer's exten- 
sion, through the bank, of his own credit-borrowing activity, it is 
rarely practicable that the proceeds be invested in such long-time 
gainful directions as an increase of plant or as an enlargement of good- 
will and connections. The bank guarantee is of necessity a short-time 
relation, and from the point of view neither of the bank nor of the 
customer are its proceeds safely applicable to other than forms of 
wealth readily convertible into cash. 

Thus the credit extended by vendors through the intermediary 
of bank guarantee resembles the credit extended through ordinary 
capital-lending, in this, that neither is a borrowing of capital from the 
bank ; but differs in turn in this, that the bank-guarantee form can 
rarely serve the purposes of social productiveness or of any long-time 
gainful application, while the exact contrary is the fact with mortgage, 
bond, and preferred-stock credits. 

But in whatever way, through credit, the entrepreneur is enabled 
to extend his operations, whether in increasing his material plant, or 
in purchasing desirable legislation, or in extending his good-will and 
connections, or in the increase of his holdings of marketable merchan- 
dise, there is much question as to the propriety of regarding any one 
of these uses of his own credit as an increase in his business capital. 
Admitting, then, that always "under the regime of competitive busi- 
ness .... credit expansion is in some degree 'abnormal' or 'exces- 
sive,' " it is to be accepted as inevitable that "there results an overrating 
of the aggregate capital engaged in industry, compared with the indus- 
trial equipment at the starting point, by approximately the amount of 
the aggregate deposits and loans on collateral?" (Ibid., p. 112.) And 
is it true that the interest outlay for loans — ^bank or other — "diminishes 
the aggregate net profit obtained by the business men engaged in 
industry .... in that it requires them to pay interest, to creditors 
outside the industrial process proper, on funds which, taken as an 
aggregate, represent no production goods and have no productive 
effect" ? 

That much of the extended credit goes into socially non-productive 
channels is certain enough ; but it is not so certain that the process is 
non-igainful in its effect upon the aggregate profits of the entrepreneur 
class as a whole ; it may — and commonly does — result in a social waste 
of productive energy, and may yet be profitable to the aggregate entre- 
preneur interest. 

But in any case the banker is paid, whether the service be or be 
not social; but paid for what? Here again the nature of the banking 
business must be firmly grasped ; bankers are paid for making the 
customer's credit into present purchasing power; under the bank guar- 



INTEREST 259 

level of compensation at below which some part of 
the supply would not be forthcoming. But as with 
labor-pain cost, so with abstinence cost — no reduction 
to a common pain denominator is possible. The re- 
muneration received is no measure of the pain under- 
gone or even of the resistance overcome. The mar- 
ginal postponement of consumption, like any other case 
of margins, is a ratio relation ; any particular item of saving 
is marginal, not because of the high significance of the 
abstinence protest, but merely because the forces making 

antee the customer's obligation becomes cash to the vendor of the 
desired goods. For this underwriting the customer pays to the bank, 
under the guise of interest, that which he would otherwise have had 
to pay to the vendor as real interest. 

But at any rate, the mere power or opportunity or ability of the 
borrower to borrow is hardly to be regarded as capital, nor is the 
exercise of the power accurately an increase of his capital, whether 
or not that which is borrowed is, to the lender of it, capital goods, or 
loan-fund capital, or mere guarantee. 

It is, however, beyond question that the fact that one is possessed 
of good credit — the ability to borrow and upon advantageous terms 
— is a source of gain to the possessor ; why, then, not call it capital, 
and the return upon it a capital rent ? The reason is that the fact of 
good credit is really not a possession at all in the ordinary case, but a 
part of the possessor — a purely subjective fact, as truly as any other 
aspect of personal power or skill or influence. True, it is an advan- 
tageous fact, a gainful attribute, but it is an attribute of the human 
being to whom it attaches, and in close analysis must receive a com- 
pensation under the category of profit in the strict sense of the term. 

But if it really becomes possible, as it sometimes does, to make a 
separation of the credit from its personal basis and foundation — to 
give it an independent and external existence, and so, in some measure 
to transfer it, say, to a corporation to be organized — this credit may, in 
this non-attached form, become, so far as the transfer is really 
possible, a distinct capital fact and, like good-will and business con- 
nection, be capitalized for whatever, in the securities market, may be 
held to be the present worth of its income-earning capacity. The 
personal rtemuneration for the separated and transferred credit- 
attribute must in such case be received in block by the original 
possessor as the present worth of its putative future effectiveness for 
gain ; and this putative earning power then becomes an asset of the 
grantee company, and may be as such capitalized like any other asset. 

In case the credit attaches to a group of individuals, as to a partner- 
ship or association, and attaches to the grouping rather than to the 
separate individual members of the group, it would then seem prefer- 
able to regard the credit attribute as in its nature and origin a separate 
and objective fact, and as thus a part of the firm or association capital. 



26o VALUE AND DISTRIBUTION 

for present consumption, representative, it may be, of very 
great or of very limited present need, are at an approximate 
equilibrium against the estimates of the advantages promised 
by postponement. 

But, on the level of the entrepreneur-cost analysis, none 
of this cost to the lender has direct significance for pur- 
poses of borrower's cost or for purposes of any cost 
investigation leading to the determination of the value 
of the product. What the entrepreneur has to pay is cost 
for him; lender's cost is relevant only from the point of 
view of explaining the causes of the situation under which, 
and as determined by which, entrepreneur cost has to be 
worked out. Just as entrepreneur cost is in no sense an 
employee cost of pain, but purely an entrepreneur compu- 
tation, so such interest costs as are relevant to the cost-of- 
production category are not costs of abstinence to those 
who do the saving, but are costs of expenditure to those 
who do the borrowing. 

This is evidently not to deny that the entrepreneur may 
himself have a postponement cost, as well as opportunity 
costs of other sorts, e. g., leisure and recreation, but the 
saver's postponement cost is not also a cost item in the 
entrepreneur reckoning; so again, when a borrower 
decides to consume the product of the loan rather than to 
use it reproductively, his choice in the direction of non- 
abstinence — his refusal of the cost burden of waiting — is 
his own, and not that of the saving lender ; it is a new and 
distinct choice. 

Thus, the "value of money" or of capital, as of labor 
or machinery or land, is a market fact, a price datum, 
which the entrepreneur takes as he finds it, without 
attempting any explanation, and without any call to make 
the attempt. Entrepreneur cost explains the price of the 
product only upon the basis and assumption of other 
established prices for the items of cost, which cost prices 
the entrepreneur-cost analysis in question is not concerned 
or competent to explain. 



INTEREST 261 

The discount rate also approximately coincides with 
some item of marginal demand; there is, as we shall later 
see, no very serious error in the doctrine that the interest 
rate reflects the marginal productivity of capital, if only 
the capital concept be interpreted widely enough and in 
the competitive, entrepreneur tenor, and if the notion of 
productivity be not socially but competitively conceived 
and be applied in a sufficiently extended sense. (See 
chap, xi.) 

This interest discussion has gone far more deeply into 
the interest problem than the cost-of-production category 
has need for; but this was nevertheless necessary purely 
for the purpose of finding out what was really needed and 
what relation interest bears to entrepreneur cost. And so 
much as this becomes clear from our analysis, that within 
entrepreneur cost must be computed, not merely wages and 
the different rents of different productive agents, but also 
a time charge for the value fund in the entrepreneur 
employment, according to the length of time of this 
employment. That is to say, cost of production reckons, 
among other items of cost, like wages, taxes, rent on land, 
rent on capital goods^ etc., an interest charge on the 
capital-fund investment. 

And as will later more fully appear, interest, in the 
sense of time discount, must be recognized as a distributive 
share, precisely because it is a cost under the entrepreneur 
system of production and distribution; cost payments by 
the entrepreneur are distributive shares to the payees. It 
is not, however, to be inferred that every case of interest 
payment is a payment made as incidental to a productive 
process. There are interest revenues that are not deriva- 
tive from the productive process, and are not to be 
regarded as distributive shares out of a produced value. 
Many cases fall purely and solely within what we may call 
the secondary distribution, as distinguished from the 
primary, the production distribution. (See chap, xxvi.) 



CHAPTER XVI 
RENT AND COST— MARGINAL COST— RELATIVE COST 

John Stuart Mill, following out the implications of 
Ricardo's proportionment doctrine and recognizing that 
value is essentially relative, perceived that costs of pro- 
duction as bearing on value must likewise be relative, and 
thus that the exchange relation between different goods can 
be affected by only such causes as unequally affect the costs 
of different goods ; and accepting also from Ricardo, and 
with approximately complete consciousness, the entrepreneur 
point of view, it became clear to Mill that, for a cost- 
of -production doctrine adequate and serviceable and con- 
sistent from this standpoint, cost, on the labor side, must be 
held to be not the labor and not the pain of the labor, but 
the wages paid for the labor; and it followed also that if, 
in a given line of employment, the efficiency is greater in 
the same proportion that the wages are higher, the relative 
wage cost is not affected. 

And it thereupon followed that wages payments become 
relevant to value only in so far as one commodity requires, 
relatively to another, more labor or a more highly paid 
variety of labor: "Things .... which are made by 
skilled labor exchange for the produce of a much greater 
quantity of unskilled labor, for no reason but because the 
labor is more highly paid." [Mill's habit of regarding 
cost items as opaque and definitive facts.] "So wages do 
enter into value ; the relative wages of the labor necessary 
for producing different commodities affect their value as 

much as the relative quantities of labor The 

absolute wages paid have no effect upon value, but neither 
has the absolute quantity of labor." ^ However, since 
variations in wages are usually general, it is. Mill says, by 

^ Principles of Political Economy, Book III, chap, iv, sec. 3. 

262 



RENT AND COST 263 

variations in the relative quantity of labor required in pro- 
duction that variations in value commonly come about.^ 
Similarly also with interest and profit elements in cost; 
these charges are presented as affecting value only as they 
enter, in varying measure, into the costs of different com- 
modities. 

It is manifest that Mill is here treating cost consistently 
from the entrepreneur point of view; labor charges are 
conceived to enter the computation only as reduced to 
price-value homogeneity in the entrepreneur outlay, — an 
unquestionable fact which, by the way, has led some 
economists to the notion that labor is an abstract fund.^ 

Likewise with capital the entrepreneur reckoning holds, 
and this equally whether the question be one of interest 
charges on loan-fund borrowing, or of rentals paid for 
machinery, or of interest paid as a percentage rate upon 
the price expression of the niachinery as a value fund — 
from which last method it has been by some economists 
inferred that capital is an abstract fund. 

And precisely as these items of outlay for capital goods 
attain the homogeneity requisite for cost computations only 
by virtue of their reduction to the common denominator of 
price, so also, under the same reduction to terms of price, 
there enter into the cost reckoning minimum wages or 
profits of superintendence; from which fact it may some- 
times be inferred that profit-receivers are also an abstract 
fund. And forthv/ith, these three separate factor funds 
having been successfully established, the logic of the case 
will compel their merger into one great and inclusive fund 
of abstract units of value productivity. 

It results, then, from Mill's doctrine, that values are 
not proportionate to the labor applied, or to the capital 
applied; nor is the problem one of some sort of compound 
proportion of these, as Ricardo seems often upon the 

' Ibid. 

" For example, Marx, notoriously ; see also Macfarlane, Value and 
Distribution, pp. 267, 270 ; Clark, Distribution of Wealth, chap. xi. 



264 VALUE AND DISTRIBUTION 

point of asserting. Instead of this, value reduces to a 
simple proportion based upon the price costs incurred, or, 
undoubtedly, if one prefers, to a compound proportion in 
which each and every outlay appears under the price 
denominator. 

But if such was really Mill's doctrine, how came it 
about that rent outlays were excluded from cost? The 
answer is that Mill did not exclude them; he expressly 
admitted them: 

No one can deny that rent does sometimes enter into cost of 
production. If I buy or rent a piece of ground, and build a cloth 
manufactory upon it, the ground rent forms legitimately a part of 
my cost of production, which must be repaid by the product.* 

Mill's view was, however, that rent outlays do not com- 
monly enter into the marginal cost of production; and 
with Mill as with Ricardo, it was this marginal cost that 
was price-determining. The doctrine applies especially — 
and most clearly and most importantly — to agricultural 
products. "Rent forms no part of the cost of production 
which determines the value of agricultural products." ^ 

This doctrine was obviously Ricardian, and needs no de- 
tailed restatement at this point. Ricardo placed rent out of 
connection with value, by getting it out of marginal cost. 
This marginal cost he found upon marginal land, rentless 
land. Nor need it especially matter if no rentless land were 
found ; for there was always the intensive margin, and at this 
margin it was equally possible to isolate a product in the 
cost of production of which rent could have no part; this 
product would therefore function as the marginal product, 
a product produced, if not upon marginal land, yet upon 
the rentless margin of rent-bearing land. And thus if (i) 
marginal cost could be identified with cost upon marginal 
land, and then (2) this marginal land could be accepted as 
the price-determining influence in cost, the Ricardian case 

* Mill, op. cit., Book III, chap, iv, sec. 6. 
'^ Ibid., chap, v, sec. 2. 



RENT AND COST 265 

was established. With rent excluded, and with capital 
reduced to the labor denominator, value became propor- 
tional to labor content. 

But these two important steps in the argument were 
merely taken for granted — assumed out of hand— perhaps 
by title of their sheer reasonableness. At all events, these 
two propositions present the problems next awaiting 
examination at our hands : ( i ) Is the cost margin an 
instrument margin? (2) And in what sense, if any, 
is one item of supply more price-determining than any 
other ? 

(i) Is the cost margin a land margin? It is significant 
upon this point to notice that for non-agricultural indus- 
tries the trend of authority appeals rather to the marginal 
entrepreneur. Mill's reasoning itself looks in this direc- 
tion, and Walker — no matter how badly his marginal 
entrepreneur was selected — stands distinctly for the view 
that marginal cost is cost at the personal margin; and so 
with most other writers. And evidently there must be a 
cultivator upon marginal land. Perhaps a sympathetic 
interpretation might harmonize the old with the newer 
doctrine, by taking Ricardo to have regarded the cultivator 
as marginal because on marginal land. But if so, we 
must likewise regard as marginal that cultivator who is 
getting on somehow with machinery, part or all of which is 
worthless — marginal capital goods; it would perhaps be as 
promising a quest to hunt for no-interest or no-wage pro- 
duction as for no-rent production. Evidently labor and 
capital may be applied upon no-rent land — no land, but it 
is equally true, and perhaps more common, that worthless 
machinery, — no-interest capital goods, that is, no capital, — is 
combined with land and labor^ or that worthless labor, 
child, pauper, invalid, or convict, is combined with capital 
and land. And it has been many times pointed out that the 
Ricardian doctrine must thereupon logically exclude 
wages and interest from value-determining cost. 



266 VALUE AND DISTRIBUTION 

And, going over to the intensive margin,® for a really 
workable land margin, it should be immediately evident 
that capital instruments applied on marginal land, or upon 
any other land, are, or may be, supplied with labor to the 
point where only the labor is remunerated in additional 
product; whereby, by parallel argument, only wages are 
left as cost. And it is evident also that every holding of 
land, if rationally handled, receives expense outlay to the 
point where, in the circumstances of each respective culti- 
vator, no further outlay is expedient in view of the further 
remuneration. That is to say, the intensive margin is to be 
found on all land, and with most, if not with all, capital 
instruments. 

And, finally, this land-margin view rnust face the diffi- 
culty, already sufficiently elaborated, that the entrepreneur 
in his borrowing does not borrow land or capital or labor, 
but only purchasing power, and follows a most catholic 
system of interchange and substitution among the various 
productive factors. 

But whether or not this land-margin cost doctrine needs 
abandonment forthwith, the entrepreneur margin being 
accepted in place of it, it is at all events clear that even 
upon marginal land there must be an entrepreneur, and 
that the land is marginal only as related to him and to his 
separate labor and equipment. It is not absolutely neces- 
sary, indeed, that wage or implement outlays be under- 
taken by him; if he can get along with valueless land, he 
may quite as reasonably do as much and as well with 
scrap-pile tools. But however this may be, it is certain 
that no piece of land and no item of implement wealth can 
ever be abandoned as unproductive, or be appraised as pre- 
cisely on the line between use and non-use, excepting as the 
expression of a human choice, a fact in the psychology of 
some entrepreneur, his judgment as to the adaptability of a 
means of production to his needs as an independent 
producer. 

* Cf. Hollander, Quarterly Journal of Economics, January, 1893. 



RENT AND COST 267 

A further argument in defense of the Ricardian doc- 
trine needs at this point to be again called to mind. It is 
urged that rent outlays upon the better land ought not to 
rank as cost items, since, for whatever is differentially 
expended in rent, a precisely equivalent differential of 
advantage is obtained; the better lands are no dearer, and 
no cheaper, at the higher rent than are the poorer lands at 
the' lower rent; the more rent payment, the more land 
service, and the correspondingly larger product : 

It is true that all tenant farmers and many other classes of 
producers, pay rent. But .... whoever cultivates land, paying 
a rent for it, gets in return for his rent an instrument of superior 
power to other instruments of the same kind for which no rent is 
paid. The superiority of the instrument is in exact proportion to 

the rent paid for it The real expenses of production are 

thus incurred on the worst land Whoever does pay rent 

gets back its full value in extra advantage, and the rent which he 
pays does not place him in a worse position than, but only in the 
same position as, his fellow producer who pays no rent, but. whose 
instrument is one of inferior efficiency.'' 

It only needs be suggested that this argument really 
abandons the land-margin and accepts the entrepreneur- 
analysis point of view, and, so far as it is valid for any 
purpose, goes to prove that the costs of production are 
equal upon all lands, and therefore that all lands are equally 
marginal, — an argument reinforcing and supplementing the 
point lately made that for every farm and with every 
farmer there is an intensive margin. 

But some still more perplexing conclusions appear to 
follow from Mill's argument, if it is accepted — conclu- 
sions that may well call for lengthy consideration, since, 
with its acceptance, there will be rendered necessary a 
fundamental revision of an entire series of important 
theoretical doctrines. 

If, from that sort or aspect of cost which is to be 
regarded as price-determining, rent is to be excluded by 

^ Mill, op. cit.. Book II, chap, xvi, sec. 6. 



268 VALUE AND DISTRIBUTION 

virtue of the fact that, for whatever increase of expense is 
made by renting the better land, a corresponding advan- 
tage of opportunity is secured and a corresponding 
increase of marketable product obtained, it will directly 
follow that interest paid for the control of larger capital, 
or higher wages paid for a better grade of efficiency, or 
for a larger force of employees, must by parallel argument 
be excluded from value-determining cost. 

That there is an inviting quality in this conclusion, 
despite the seeming paradox and absurdity of it, may be in 
part inferred from the fact that, as will later appear, 
some of the Austrian school have, on entirely independent 
reasonings, arrived at it.^ Mill's doctrine, outlined a few 

^ The following resume of Pierson's cost doctrine (Dr. N, G. Pierson, 
Principles of Economics, translated from the Dutch by A, A. Wotzel, 
Macmillan, 1902) will be of service as throwing some light upon the 
later trend of cost doctrine with the Austrian school. The interests of 
space must stand as excuse for the more or less chaotic fashion of 
quotation and comment in the following ; when words other than those 
of Pierson — as translated — are used, or when comments are inter- 
polated, brackets will so indicate : 

"In the language of every day, cost price indicates the sum total 
of the disbursements which an entrepreneur has to make in order that 

he may procure a given quantity of commodities This is 

the only fact that possesses interest for him when he wants to know 
the cost price of his products. But the economist, when he is consider- 
ing the conditions for promoting the welfare of society as a whole, has 
to be careful not to view things from the standpoint of the entrepre- 
neur. Under no circumstances may he place wages on the same foot- 
ing with fuel and fodder as part of the cost (p. 62). [Surely there are 
here two distinct points of view, and each for its purpose is worthy of 
consideration ; but it has yet to be shown that, in an investigation of 
value in a competitive society, we may safely abandon the competitive 
reckoning and adopt the social point of view.] .... Let us imagine 

a number of persons united in a co-operative society One 

contributes capital and land ; another his knowledge ; a third his muscu- 
lar strength, and so on Now as to cost: many have had to 

draw something on account in the course of the year Are 

these disbursements part of the cost? Certainly not: they are portions 
of the jointly acquired income resulting from the enterprise. The 
only items that can be reckoned as costs are : corn used for sowing, 
live stock that has perished [etc.]. [This notion that cost can in no 
case cover alternative income has this fault at least, that it gives no 
notion or measure of the influences that serve as counter-inducement 
against the production of the product in question. As Crusoe must 
reckon a displacement cost, a disadvantage by foregoing — opportunity 
cost — so must society face a precisely similar cost in the alternative 



RENT AND COST 269 

pages back, that value is affected only by relatively 
high wages, or by relatively high interest outlays, or — and 
here the interpretation is less confidently made — by rela- 
tively high rental burdens, has the same logical trend and 
must pass for something more than a mere analogy. 

Taking note that the inquiry at its present stage 
engages us in a quest for personal margins, rather than 
for instrument margins, let us ask ourselves what cost 
influences are of the sort to make one producer marginal as 
against another, that is, what costs are margin-determin- 
ing costs. 

It is evident that a fall in demand, expressing itself in 

applications of social productive power.] Let us now modify our hypo- 
thesis : The workers .... demand a fixed wage in lieu of weekly 
payments on account, and the landowners demand a fixed rent. The 
result of this is that the enterprise loses its co-operative character, as 
the risk will, in future, be borne by certain members of the society 
only. But this does not change the economic character of what the 
workers and the landowners receive. That which is paid them con- 
sists still .... of products of the enterprise (p. 62). [This is the 
social point of view at the extreme of statement. The truth seems to 
be that, precisely because the co-operative character has been lost and 
the enterprise has come to be conducted for individual profits, 
there has come to be someone to reckon these wage and rental 
outlays as cost. True the wages and the rent are incomes derived, as 
all incomes must be derived, from product, but that which is income to 
laborer or landlord may be none the less cost to the employer or the 
tenant. And it is precisely for this reason that the investigation of 
costs and of their relations to value, is at the same time an investiga- 
tion of distribution.] 

"We see that what the entrepreneur regards as the cost price of 
his products is a very mixed sum. It certainly includes what would be 
the cost in the narrower or social sense ; but .... generally the 

greater part .... consists of income and nothing else 

The entrepreneur has every right to reckon all these prearranged 
disbursements as part of his cost ; but we know very well, and so does 
he, that they only make up the sum which he must pay out of the 
income he earns as recompense for the assistance afforded him in 
earning it (p. 63). [There is surely no room for difference of opinion 
here, excepting as to the question whether, in a competitive society, 
the costs of competitors are the costs with which an investigation 
of value is concerned, and whether in fact the other concept of cost, 
the social concept, has any relevancy to the problem in hand.] The 
greatest confusion of thought arises from a failure to observe the 
distinction between cost from the point of view of the entrepreneur 
and cost from the point of view of society as a whole (p. 63). 

"We now return to the question. What is the price that mankind 



270 VALUE AND DISTRIBUTION 

the falling price of some one product, must drive some 
producers into other lines of production; but which pro- 
ducers? Only such product will continue to come upon the 
market as can be produced at this lower price ; the price 
will still be commensurate with the costs of that producer 
who now stands as marginal under the new conditions; 
but would this fall in price be selective, or be influential 
in any degree, in determining which producer should 
be marginal? And so with all the outlays of pro- 
duction; each producer faces the same external con- 
ditions of production, the same wages and rent and 
interest levels; these burdens are common to all the com- 

has to pay for the things that it needs? The price consists not of 
wages, but of labor ; not of interest or capital^ but of the using of 
capital; not of profit, but of care of management (p. 64), [What of 
rent, or of the use of land ? Does this go or not go with interest or the 
use of capital? And only a little while ago it appeared that the 
co-operative society had no costs other than the consumed material of 
agents. Perhaps it is important that Pierson asks here, What is the 
price — there, What was the costf^ Wages, interest, and profit, speak- 
ing in the social sense, are not parts of the cost of production ; they 
are parts of what is produced. They are not things sacrificed, but 
things gained (p. 64). [But note that labor, as distinguished from 
wages, and the uses of agents are still called the prices of product, 
though it is perhaps not clear whether or not they are costs.'] .... 
If we want to ascertain the net as distinct from the gross income of 
society .... we need only deduct what has been spent for the 
purpose of replacing and maintaining commodities which have been 
wholly or partially destroyed in the process of production itself. But 
in their turn these commodities are the fruits of labor, and so we 
arrive at the conclusion that labor, the trouble of production, is the 
sole price which mankind pays in order to procure such things as it 
deems to be necessary. That is to say, the only positive price ; for 
there is also a negative price, if such an expression be permissible. 

The negative price consists in absence from present enjoyment 

It is .... a sacrifice made by those who practice it ; a price, a 
negative price, if we must so call it, paid by man in order to obtain 
the commodities which he desires to possess (p. 64). [But this, one 
fancies, is not intended to make interest a cost ; and the uses of 
capital have been reckoned once as "the price which mankind has to pay 
for the things it needs ;" now the sacrifice of absence in accumulating 
and holding capital comes in somehow, seemingly as a new cost, but a 
cost in the negative sense. The reconciliation must be found in some 
difference of meaning between cost and price. But all the while, what 
about land and the compensation for not wearing it out — for applying 
the expenses of upkeep ? Abstinence certainly obtains here if anywhere. 
Is land regarded as capital and are its uses parallel to uses of capital, 
which latter are ranked as part of "mankind's price"? At any rate, 



RENT AND COST 27I 

petitors in the field; why then is any producer marginal? 
It is true that for such industries as are distinctly capital- 
istic, or distinctly land-using in their technique, or distinctly 
wage-paying, there will follow, in case of changes in wage 
or interest or rent levels, marked effects upon the relative 
volumes of products, and upon the relative prices of 
products. But the question again presents itself, are not 
all competitors equally subject to these conditions? What 
influences select the marginal man, the price-determining 
man, so called? 

That one man is marginal as against another must, it 
seems, be due to such peculiarities in him, or in his circum- 

it is to be remembered that some of the land is not the result of labor, 
while, as certainly, some of it is. This seems likely to make trouble for 
"the conclusion that labor is the sole price that mankind pays, etc." 
But inasmuch as the concept of price, whether it mean the same 
thing as cost price or not, is a social concept, and therefore has, in a 
competitive society, little, if anything, to do with value, it perhaps does 
not greatly matter what relation to the case rent and land and land 
uses may hold.] 

"Not only do the expressions value and cost price [cost price mean- 
ing labor and abstinence] differ widely in meaning, but the one 
actually means the reverse of the other. Nevertheless .... the 
relation between the value of things in most cases corresponds pretty 
nearly to the relation between the respective cost prices. 
[This sounds Ricardian, but it is not ; for] How is this 
to be explained? The reason is that everyone prefers to apply his labor 
to the production of such things as will afford him the greatest amount 
of enjoyment. Value is the regulatrix, so to speak, of labor. It deter- 
mines the direction in which the objects to which, labor shall 

be applied. Speaking very broadly, every kind of labor will be con- 
tinued up to the point at which it becomes as remunerative as any 
other kind of labor. [And one would infer that it will be continued 
only so far ; but of course this is simply awkwardness of expression. 
The real significance of the principle would be better brought out, were 
it said that labor will not be continued in one direction when it 
becomes less remunerative than in any other direction, that is, than 
the same labor in a different employment ; but this would have implied 
and almost imposed the notion of a displacement, a sacrifice or oppor- 
tunity cost. And note that the phrase less remunerative or as remun- 
erative is not quite accurate ; less attractive, all things, including 
remunerations, being considered, would adequately cover the case.] 
As a result of this, most commodities automatically acquire a certain 
value in relation of each other, which corresponds approximately to the 
proportion between their respective costs in labor (p. 65). [This 
doctrine of choice between the alternative applications of the productive 
powers at one's disposal must logically include costs, not merely in 
labor, but in capital and land.] An example may serve to make this 



272 VALUE AND DISTRIBUTION 

stances, as render his relation to the market situation a 
peculiar relation. And this is not to deny that there are 
lands especially adapted to particular lines of productioji 
and thereby especially subject to change in cultivation with 
changes in market levels. But that under a particular 
cultivator, these lands are especially liable to change in 
use, must rest with the peculiar tastes, abilities, or situation 
of the particular cultivator. 

Nor does this view at all deny that rent, interest, and 
wage outlays are costs ; clearly they are costs ; no issue is 
offered upon this point. But are they those parts of cost 
by virtue of which one individual becomes marginal as 
against another? Margin-determining influences — the 

clear. Suppose that in a certain country it requires exactly the same 
effort to produce half a ton of wheat as it requires to produce a ton of 
rye. The proportion in which the cost price of wheat stands to that 
of rye will therefore be as 2:1 (p. 65). [The example raises more 
difficulties than it clears up ; for evidently we are not now talking of 
any one man's choice as to how he shall apply his productive forces 
and agents, in which case labor and value products might be assumed 
to be proportional ; but we are talking of society and of market values ; 
it therefore becomes impossible to assert that, country-wide and for 
different men, wheat takes twice as much labor as rye, unless upon the 
assumption of some sort of jellification, both of labor and of land, — 
some reduction in value denominator or otherwise, to homogeneous 
quantities.] .... 

"The value of things, as some people put it, depends upon or is 

determined by their cost of production However .... 

things do not derive value from the fact that they have cost labor ; 
labor has been expended upon them because they have value. [This 
leaves the quantum of resistance, the forces limiting supply, still to be 
explained, which explanation cannot, in terms of utility or value, be 
accomplished, excepting as expressed in the pull upon labor (and upon 
land and capital) exerted by the other values alternatively possible ; 
and this reinstates the doctrine of costs, under the form of sacrifice, 
displacement, opportunity foregone.] The value of commodities is not 
determined by the amount of exertion involved in their production, 
but by the amount of inconvenience arising from our being deprived 
of them. [Here again is utility asserted not merely as primary, which 
it is, but as exclusive of cost, which it is not ; since cost and alternative 
utilities or values are — often, at least — one and the same.] Instead, 
therefore, of saying that the values of things depend upon their cost 
of production [labor cost], let us rather say that the value of com- 
modities .... must, in the long run, coincide with their respective 
costs of production (p. 66). [All of which would be satisfactory to any 
cost-of-production theorist, were it not for the distinctly labor-cost 
implications and emphasis.] . . . ." 



RENT AND COST 273 

decisive variants in the situation — are found in the ability 
or lack of ability to buy closely, hire cheaply, organize 
economically, sell skilfully, or in the degree of aptitude or 
preference for some other line of production. That is to 
say, cost as a margin determinant is purely a matter within 
the personal aspects of entrepreneurship, a managerial 
fact, a subjective phenomenon, in which all the influences 
bearing upon the psychology of choice between different 
occupations or between occupation and leisure have their 
place. 

This leads us back to the second part of our inquiry: 
Of what significance is the marginal instrument or the 
marginal producer, when once one is found? In what 
sense, if any, is one item of supply more price-determining 
than any other? For, after all, all investigations on the 
cost side of the value equation are important only as bear- 
ing upon the question of the supply, and all our talk of 
margins serves only the purpose of explaining supply fluc- 
tuations. It is true that only by the close analysis of what 
is characteristic in marginal relations does the ready and 
sensitive response of supply and demand and value to the 
changing conditions of production become intelHgible. 
But it remains true that market value is the equation point 
between the whole volume of supply over against the whole 
volume of demand. Each and every item of supply has its 
small share of influence upon the market outcome. "The 
withdrawal of iron from any one of its necessary uses 
would have just the same influence on its value as the 
withdrawal from its marginal use." " The marginal item 
whether of demand or of supply differs from any other 
item only that through it, as marginal increment, a deter- 
mination may be reached as to just what effect it, or any 
other single item, has had upon the price adjustment, meas- 
urement being made from the point at which all the other 

' Marshall, Principles of Economics, ^ih. ed., p. 580, note. 



274 VALUE AND DISTRIBUTION 

forces in the market would otherwise have left the price. 
Not to the soldier who fires the last gun is the victory to 
be accounted, por is the smallest boy who touches off a 
fire-cracker to be held responsible for the entire Fourth of 
July hubbub. If there is accurately a producer upon the 
margin, the market price must coincide with his cost; but 
neither the point of adjustment nor the producer at this 
point is the determinant of price. True it is that if he were 
not in the case, the price would have been other; but so is 
this true of all the other producers respectively. The mar- 
ginal item of supply is one among the whole number of 
items and, as such, has its part in the resulting adjustment, 
but it is the entire supply in equilibrium with the entire 
demand that gives the market adjustment. It is true that 
the added weight of the marginal item has, in strict theory, 
moved the price from one point to another, but the basis 
upon which this effect is worked and the situation which it 
modifies are the results of thousands of other units of 
supply in face of thousands of offers. 

At the most, then, price is to be understood not as fixed 
by marginal cost but as commensurate with marginal cost. 
Who shall produce or who withdraw is for the most part a 
result of price, and only in the smallest degree, as putting 
so to speak, a fine edge upon the price, a causal fact. To 
claim for the marginal item either of demand or of supply, 
or for both, the function of price determination parallels 
the case of the fly in Aesop's tale who sat on the axle tree 
of the chariot and said, "What a dust do I raise!" 

The truth of the case appears to be as follows : There 
are margins of many and various sorts, all important to the 
problem of supply. Prices of agricultural products are com- 
mensurate with cost at the extensive land margin, but 
equally so with cost at the capital-goods margin. So also 
of the intensive margin, of the day's-end fatigue or recrea- 
tion margin, and of the alternative-opportunity margin. 
Each of these margins stands as a fact or an influence for 



RENT AND COST 275 

the limitation of supply ; the refusal' price, the "necessary 
price," at each of these margins is the market price.^" 

But some of these margins are of the distinctly personal 
sort, as, for example, the fatigue and the opportunity mar- 
gins; nor is there the possibility of any instrument margin, 
excepting as through the relation of the instrument to the 
entrepreneur's personal activity, as an aspect of the entre- 
preneur problem, and as an expression of the judgment and 
choice of the entrepreneur fact in production. 

Any change in price will involve a rearrangement in the 
entrepreneur complex or group of productive powers, a 
readjustment or realignment of his productive forces and 
agents. At the intensive margin of effort, and commonly 
at the intensive margin of utilization of his instru- 
ments and agents, each and every entrepreneur is 
marginal ; that is to say, not all of his product is equally 
near to the margin ; he has different costs for different incre- 
ments of product. With falling prices any entrepreneur 
may transfer part or all of his lands to other products, or 
may sell off part or all of his capital goods, or reduce his 
labor investment, or restrict his loan- fund borrowing; or he 
may, leaving part or all of his investment undisturbed, 
transfer part or all of his personal activity to his next most 
attractive alternative ; or he may completely abandon the 
old line of production. In this case of abandonment also, 
he and his capital may hold together as one productive 
group or complex, or may scatter into various industries ; 
with falling profits, and possibl}^ with failing pleasure or 
interest in the business, or at the approach of old age or of 

" In the main, of course, whether any man is marginal, or at what 
point in his production he reaches a margin, is the result of the 
objective conditions that he has to face. Each margin is thus rather the 
effect of price than the cause of it ; the total situation is directive of 
each person in it, who in turn himself helps to make the situation. 
Each person must be recognized as in his measure contributing toward 
the total situation. Cost has thus — and precisely at this point — to do 
with price. If there is confusion in thinking of any particular fact as 
at the same time both cause and effect, let one imagine himself as 
jumping — the last person — upon a crowded raft, and sinking with it ; 
does one sink the others or do they sink him? 



276 VALUE AND DISTRIBUTION 

ill health, he may decide to retire from productive activity, 
reducing his possessions to the form of loan-fund capital. 
But whatever may be the modifications which result, they 
will come about through him as a man marginal in some 
or all of his activities, and no instrument will be marginal 
excepting in its relation to him. And no one of all his 
possible margins, and no total of all the different margins 
of all the different entrepreneurs, will be price-determining 
or even price-influencing except to the degree that supply 
undergoes modification and to the extent that supply is an 
influence in the fixation of price. 

As an entrepreneur problem, then, all outlays are ele- 
ments of cost; and personal preferences, repugnancies, con- 
siderations of climate, neighborhood, home ties, national 
prejudice, wholesomeness, cleanliness, good repute — all are 
elements in cost to the extent that they serve to limit supply, 
the cost problem with reference to each man, and thereby 
to any instrument or agent under his control, being simply 
and solely to determine the point at which supply in differ- 
ent quantities can be had from him, and the degree and the 
extent of his elasticity in production with changes in price. 
And it is as one among all the other cost influences, but 
commonly as the influence of paramount importance, that 
opportunity cost acquires significance in the value problem. 
Cost is simply the money expression of the total of resist- 
ance to the entrepreneur's production. 

It is evident, therefore, that wages, interest, and rent 
are, from one point of view, income, but to the extent that 
they are received from entrepreneurs, are costs to entre- 
preneurs. Value and distribution are therefore, as has been 
said, merely different aspects of the same problem. 

It is, however, an easy inference, but none the less a 
mistaken one, to conclude that costs are equal to value, that 
is, that all of the product is distributed within the cost 
category. All excepting the marginal items of product 
afford to entrepreneurs a surplus above cost — producers' 



RENT AND COST 277 

quasi-rents, occupation differentials. Of this entrepreneur 
remuneration, only a part is necessary remuneration — mini- 
mum profit. All of the producers' differentials, personal 
quasi-rents, fall within wages of superintendence, profit in 
the broader sense, but not cost elements in profit. 

The problem of each independent producer — each entre- 
preneur — is how through one or another combination of the 
productive energies at his disposal — land, capital, hired 
labor, and his own activity — to obtain the results most 
desirable to himself. Both costs and distributive shares 
stand, therefore, as entrepreneur adjustments. Each human 
being has before him to decide, in view of his peculiar 
situation and adaptation, whether he shall be an entre- 
preneur, a purchaser of productive powers, a combiner 
and adjuster of productive energies, or whether he shall sell 
his own productive energy to another, shall be a hired item, 
a mere instrument, like the land or the draught horse. The 
wage-earner differs from the draught horse only by the 
fact that the wage-earner may become an independent pro- 
ducer or an employing entrepreneur. As wage-earner he 
sells his productive power precisely as the capital-owner or 
the land-owner sells the productive efficiency of the things 
that he controls. ^^ As far- as the entrepreneur's personal 

^^ All of this, of course, conceives cost as an entrepreneur computa- 
tion. Were it here important, it would doubtless be possible to inquire 
into cost as looked at from the point of view of the wage-earner ; 
only that this cost would not refer to the cost of the produced com- 
modity, but only to the cost to the laborer of his labor pain or of the 
remuneration for it. This cost might be one of labor pain or of dis- 
placed recreation or both ; or if, as is more commonly the case, not 
leisure but another sort of work, or the same kind of work under 
another employer, were the displaced fact, the cost would be one 
within the usual opportunity category. 

For purposes of investigating the causes of the labor situation in 
which the employer is placed and in which his costs are to be com- 
puted, there is doubtless importance in the laborer point of view and 
manner of analysis. But this investigation is on the level of the expla- 
nation of entrepreneur costs ; for the entrepreneur the cost question is 
one of how much and not why. His costs are as they are. 

But it is still to be noted that the mere item of outlay may be 
quite misleading as measure of cost. Cost, it must be remembered, is 
that total which the market price must remunerate if production is to 
be maintained ; it may then well be true that for producing an output 



278 VALUE AND DISTRIBUTION 

remuneration is concerned, it suffices to say that if he 
cannot anywhere, after his different outlays, retain for him- 
self a return as desirable (not necessarily as large) as that 
which he could control through wage service, wage service 
will be his alternative. And thus again we return to the 
fact that all these different outlays, — rent, interest, and 
wages among them, — are elements of cost, that is to say, 
form part of that total for which the market price must 
serve as indemnity if the production of the entrepreneur is 
not to diminish or cease. ^^ 

But after all is said, there is still an aspect of truth in 
Ricardo's dictum that "corn is not high because rent is 
paid, but rent is paid because corn is high If the 

of 105 the necessary outlay is only 100, but that this same outlay else- 
where applied may control a return of 102; in such case, the alterna- 
tive productiveness of 102 and not the smaller 100 item of outlay must 
be accepted as the cost. 

*^ Acquiescence in the traditional terminology of the cost discus- 
sion, with its categories of rent, interest, wages, and profits, has seemed 
to be imperative here in view of the particular issue under discussion 
— the rent-cost problem — and of the exigencies of an intermixed expo- 
sition and criticism. 

So important is the doctrine of this chapter, especially with 
regard to the multiplicity of the different margins, and their nature, 
so great the danger of misinterpretation, and so imperative the result- 
ant call for all possible expositional clarity, that, even at the certainty 
of some repetition, a restatement of the doctrine appears to be desir- 
able ; a changed direction of approach will, in some measure, require 
the anticipation of certain important steps in the general argument. 

The marginal cost of product coincides reasonably accurately with 
the expense at the extensive margin, or with the displacement either 
of agricultural or of non-agricultural product at the extensive margin, 
or with the displacement either of agricultural or of non-agricultural 
product at the intensive margin : and also, for each and every use of 
each and every grade of land, there is — or may be — a question of some 
alternative use, the displacement of which would be refused were 
prices in the first use appreciably to fall. 

Here are surely margins enough ; but there are more. We may as 
well talk of the extensive margin being an interest or a wage margin 
as a land margin. So, at the intensive or at the alternative margin, the 
choice is really whether, under the conditions, it is as gainful to apply 
more labor or capital here as elsewhere. Still further, in each of these 
problems, as in practically every problem, capital and labor come, as 
regards each other, to an indifference of productive applications. Evi- 
dently the margins are multitude ; and all that we may say, from the 



RENT AND COST 279 

high price of corn were the effect and not the cause of 
rent, prices would be proportionally influenced as rents 
were high or low, and rent would be a component part of 

cost point of view, is that any one of the agents may, through a 
change in its costs, become the margin-changing agent — that is to say, 
the agent deciding the producer to modify or abandon his line of 
productive activity. 

This amounts to saying that over against the general situation, 
which the cultivator does not control, and the changes in which express 
themselves as fluctuations in the volumes and in the values of produc- 
tion goods, is the cultivator, whose problem is always to find that line 
of productive activity the conditions of which are, relatively to him, by 
virtue of his peculiar adaptations, his efficiency, his preferences, and 
his equipment of goods, most advantageous or least resisting. 

Viewed, then, as a whole, the aggregate human demand for goods 
relatively to one another being assumed, and the aggregate human 
efficiency for production in its actual environment of land and capital 
being taken for granted, — and all this in connection with a system of 
production functioning under the direction of independent and compet- 
ing human agents, each engaged in the attempt to find for himself the 
most advantageous line of application of the productive powers and 
agencies under his control, — market value emerges as a point of adjust- 
ment or of equilibrium for all the forces and influences engaged. 
Normal value is the point at which, if conditions remained the same, 
the equilibrium would be permanent ; changing values are merely points, 
in a moving equilibrium, reached but only temporarily held, under these 
readjustments and realignments of productive activity, brought about 
by the changing conditions of demand, of processes, and of supplies of 
productive agents. 

Man is to be conceived as the subject and the center of economic 
science ; his environment of land and capital (and, for the individual, 
of his fellows) as his opportunity ; his industrial product as his remun- 
eration ; his economic activity as his attempt to produce and to 
exchange this product along the lines of least resistance (sacrifice). 
Normal price is to be conceived as the point of least resistance, not 
only for the buyers and sellers directly engaged in any employment, 
but also for producers in other employments seeking those lines of 
activity affording the most satisfactory — or least unsatisfactory — 
remunerations. "Market prices are found to fluctuate in either direc- 
tion about these normal or ideal prices, and cannot, in the competitive 
adjustment of sacrifice, long or widely depart therefrom. In short, 
the normal price is that price at which no producer can, to his own 
thinking, better employ himself in some other line of production. 
Prices generally would stand at their normal, if no producer or con- 
sumer could to his own thinking advantageously change his manner of 
economic action. But, like the ocean, market values have no rest. 
Prices ripple and wave above or below their ideal level, as desires and 
appetites, opportunities and abilities, slowly or rapidly change in force ; 
yet .... none the less .... confess the controlling power of 
this level as truly as do crest and trough their subjection to the ideal 
level of the sea." — Davenport, op. cit., p. 104. 

But men as employees are passive facts, mere agents under the 



28o VALUE AND DISTRIBUTION 

price." " But, obviously, these same remarks apply equally 
well to wages and interest. Wages are high all along the 
Hne because, in view of the high productive powers of 
labor, entrepreneurs' competitions are placing a high 
market price upon that labor; thus the production of any 
particular commodity has to face this high wage-cost level, 
and must recoup itself for these wage costs through a 
corresponding level of prices. 

It is even so of any agricultural product; the supply of 
land, relative to the demand for agricultural products in 
general, gives, through entrepreneur bidding, the rental 
values to different lands; this rental value stands as a 
datum of cost for the production of any particular agri- 
cultural product. But in ultimate analysis, it still stands 
as true that it is not the rent that makes the prices high, 
but the scarcity of land. 

The real and the recurrent difficulty in all of this is that 
costs and the relations of cost to value do not touch the 
ultimate causes in the case. Entrepreneur computations 
take all items of outlay cost as data, as definitive, funda- 
mental facts, which, for any other than the entrepreneur 
point of view, they indubitably are not. 

All of this, however will get clearer with a change in 
point of view. 

A collectivist society, having no rentals to pay, could 
compute none as facts of cost. In case the improvement 
or upkeep of land were under consideration, the sole ques- 
tion would be whether the energies and materials applied 
could not be better applied elsewhere. The sole question 
in the use of already existing land opportunities for any 
particular product would be whether these opportunities 
could not better be used for something else. The only 
resistance to the current production would be — so far as 

direction of managing producers, and are .therefore only potentially 
directing forces. The problem of production and of marginalship is, 
accordingly, an entrepreneur problem. 

^^ Ricardo, Political Economy, chap, ii, sec 29. 



RENT AND COST 281 

concerned the land — the displacement of something else. 
That is to say, the collectivist computation of land costs 
would be entirely one of opportunity cost. Were the land 
of a sort adapted to only one product, a cranberry swamp 
as a possible example, no cost could be computed for the 
land use. Of such land it might be said that its utility was 
high because its products were highly useful ; but land-wise 
the utility product would have no cost. But, with land of 
alternative applications, the displaced product would stand 
as the land cost of that product actually produced. If the 
displaced utility were great, the produced utility would also 
have to be great or be foregone. While it would doubtless 
be true that the utility of the land could be ascribed to its 
productiveness for, say, corn, it would none the less remain 
true that the corn utility, at below a certain measure, 
would not be permissible of acceptance, because of the high 
utility of the land as reflected from its adaptation to 
another product — wheat, for example. 

For competitive society, Ricardo's doctrine should, 
therefore, be revised to run something as follows : Ulti- 
mately, corn is not high because rent is paid for corn land, 
but rent must be paid, because, to command the land for 
corn, a rental possible from some other product has to be 
refused. 

But, so formulated, the doctrine is, in truth, rather 
transitional between the collectivist and the competitive 
points of view than fully competitive; it retains, indeed, 
strong traces of its collectivist origin. For, under com- 
petitive conditions, not that rent barely sufficient to dis- 
place the alternative use is the land cost, but the rent really 
paid in the actual use. 

Transfer the case fully into the entrepreneur competi- 
tion, and all this becomes clear. Land, being limited in 
quantity, is therefore cultivated to an extensive margin. 
The limitation upon the land supply expresses itself under 
the guise of rent for all lands or powers of land above the 
margin. Rent is fixed by the bidding of entrepreneurs in 



282 VALUE AND DISTRIBUTION 

view of the fact that a possessor of the better land is, by 
virtue of his rent outlay, excused from an approximately 
correspondingly high outlay for labor and instruments of 
production. Rent is thus an item in entrepreneur cost, and 
is causal in the same sense that other outlays are causal — 
in the sense, that is to say, that this rent is the form under 
which, in competitive production, a shortage of land 
expresses itself. The rent is a necessary outlay, or, if 
avoided, must be avoided at a correlative increase of outlay 
in other directions. But, ultimately speaking, prices are 
not high because rent is paid, but because of the limitation 
upon the supply of land which, by driving cultivation to 
poorer land powers, must give, whether under collectivist 
or under competitive production, a distinct advantage to 
all cultivation upon non-marginal lands. But, under com- 
petitive production, these differential advantages take the 
form of property rights for their possessors ; the land 
acquires the aspect of a competitive agent affording a 
valuable opportunity, by the use of which a cost of produc- 
tion could be obtained lower, were the rent not computed, 
than other costs, and lower than the market value of the 
product ; thus the rent comes necessarily to be paid. 

But, ultimately speaking, the rent does not increase 
the price ; by the very fact that the land is limited the high 
price is unavoidable. Unquestionably, were the land sup- 
ply greater, the rent would be lower, and the prices lower; 
but mark, not, in last analysis, lower because the rent is 
lower, but because conditions have come to exist, which, 
in making the lower price possible, have made the high 
rent impossible. The rent cost and the relation of it to 
value are mere expressions, in terms of entrepreneur com- 
petition, of causes underlying and ultimate — environmental 
facts, with which production must get along as best it may. 

The foregoing conclusions lead directly to the con- 
clusion that, from certain points of view and for certain 
purposes, it is necessary to recognize as the true cost 



RENT AND COST 283 

determinants these environmental facts, the situation facts, 
as they will henceforth be called. What this term means 
may possibly become clearer with a review of one of 
Ricardo's comrade controversies with Malthus : 

Malthus had argued that rent can arise only when land 
is fertile enough to yield a surplus above the subsistence of 
the laborer. For our present purposes, and for all the 
purposes of Malthus' argument, and in closer conformity 
with later theory, this term subsistence should better be 
interpreted in the sense of wages, the doctrine then run- 
ning to the effect that unless the yield will more than suffice 
to pay the wages, there can be no rent collected. 

But under either interpretation it is clear that were all 
land sufficiently poor — and all equally poor — and yet, with 
all of its badness, unlimited in quantity, there could be no 
rent. Thus Malthus' position sums up as follows : Two 
conditions must concur before rent can emerge, viz., that 
there be land good enough to yield this surplus, and yet 
that there be a scarcity both of this and of better land. 

These better lands — what there were of them — Malthus 
regarded as a source of material well-being, a social asset; 
rent is the market e-xpression of this social good fortune. 
True, it might be objected that, with this land in the 
possession of private owners, the attendant advantages 
must accrue, not to society in general, but to these owners ; 
but, even so, the owners must be admitted to be a part of 
society; and more than this, not all the benefit could be 
monopolized by the owners ; as a condition to the receipt of 
their rents, the land must be utilized, with a resulting 
larger supply of products and with lower prices to con- 
sumers. 

But Ricardo placed the emphasis differently — not upon 
the "I have" aspect, but upon the "Oh, had I." The exist- 
ence of rent he interpreted as an expression of the nig- 
gardliness of nature, the evidence of the difficulty under 
which society is laboring in getting a living. Out of this 
bad case, progressively getting worse, the land-owner is 



284 VALUE AND DISTRIBUTION 

acquiring a progressively larger deduction from what 
others can enjoy — that is, out of a national dividend griev- 
ously restricted at the best, is acquiring not merely an 
unearned increment, but an increment received out of the 
social distress, and greater as this distress is greater. 

Here, as mostly elsewhere in economics, the Ricardian 
temper and mood and point of view have carried the day; 
and not without justification, for Ricardo was right. But 
so was Mai thus. Given the ideal endowment of piety, with 
a sufficiently thankful heart, one has it always at hand to 
render thanks that things are no worse: "Every misery 
we miss is a new blessing, and therefore let us be thank- 
ful," spake the completely genial fisherman. And so, in 
substance, Malthus was thinking how much better things 
were than if they had been worse; Ricardo, of how much 
better they might have been if they had not been so bad. 

But as a mere distribution fact, as distinguished from a 
production fact, Malthus' view appears to present the better 
doctrine. What land there is, is wealth, as clearly as what 
capital there is. As a question, however, of the ethics of 
institutional distribution, the problem of the unearned 
increment, the right of property in the rent differential, 
Ricardo's view has something more to say for itself. 

But as a problem of costs in competitive production, 
the two views need not have differed in application; 
Ricardo misapplied his doctrine.^* 

But it is none the less important to recognize that the 
land and the capital and the labor do not make the costs 
and the value of the products high, but low ; the more 

" On the main issue, Senior sided for the most part with Malthus. 
Ricardo had written (Principles, p. 53) : "The labor of nature is paid, 
not because she does much, but because she does little. In proportion 
as she becomes niggardly in her gifts, she exacts a greater price for her 
work. Where she is munificently beneficent she always works gratis." 

Senior replies : "Mr. Ricardo seems to have forgotten that the 
quality which enables land to afford rent, namely, the power of pro- 
ducing the subsistence of more persons than are required for its 
cultivation, is an advantage without which rent could not have 

existed That we have in this country perhaps a million of 

acres capable of producing, with average labor, forty bushels of corn 



RENT AND COST 285 

agents and instruments, relatively, especially adapted to 
particular products, the greater the relative supply of these 
products and the lower the price. In fact, unless the case 
be one of complete indifference, no producer employs any 
particular agent or instrument, as against another, except- 
ing as a saving of expense is promised thereby ; all produc- 
tion goods are, for their particular products, value- 
diminishing influences. It is the scant supply of land and of 
capital and of adapted labor, and not their presence, which 
explains the relative scarcity of the product, its high value, 
the relatively high hire of the productive factors, and the 
correspondingly high capitalized value of such of them as 
can be capitalized. As a question of costs, rent, interest, 
and wages are, therefore, not ultimate explanations of 
value. The fundamental determinant is "situational," as 
connoting the entire case on the cost side, the original 
environment, the volume and kinds of saved wealth, the 
qualities and adaptations of men, the degree and the direc- 
tion of development in the sciences and arts of production. 
Entrepreneur outlay costs are the values placed by com- 
petitive bidding upon the various opportunities and auxil- 
iaries in the productive process, in view of the market 
values of the resulting products. 

But that the market remuneration of any productive 
fact is a derivative from its value-producing power, in 
view of the existing conditions of demand and of supply, 
does not imply that this remuneration is either equal to its 
contribution or is proportional to it, or, indeed, that the 
precise amount of its contribution is ascertainable, or that, 

an acre, is a benefit ; that we have not more than a million such acres, 
is an evil. That the average amount of what an agricultural laborer 
produces much exceeds what is absolutely necessary for the subsistence 
of an agricultural family, is a benefit. That the extent of our fertile 
land, and the amount of our capital, in proportion to our population, 
are not sufficient to enable him to consume, directly or indirectly, for 
his own advantage and that of his family, all that he produces, is an 

evil To produce rent, both the benefit and the evil must 

coexist. The one occasions rent to be demanded ; but it is the other 
that enables it to be paid. Mr. Ricardo's attention seems to have been 
confined to the evil." — Senior, Political Economy, p. 138. 



286 VALUE AND DISTRIBUTION 

if ascertainable in its relation to any one entrepreneur, 
this contribution would not be a different one for each dif- 
ferent competing entrepreneur. In truth, the cost to any 
entrepreneur is rarely, if ever, the precise equivalent — were 
this quantum an ascertainable one — of the value signifi- 
cance of the productive factor to him; otherwise there 
could be no non -marginal entrepreneurs, and no producers' 
quasi-rents. And even at the margin the equivalence is 
really impossible of establishment; complete proof of this 
last must, however, be postponed to later aspects of the 
argument. 

Recurring again to the Ricardian doctrine as to the 
relation between land margins and costs, a more important 
and — fundamentally — a more decisive argument remains 
to be presented: There is no land margin of the sort con- 
templated in the Ricardian doctrine. 

Productive agents of countless kinds, labor of different 
grades of skill in all the different trades and subdivisions of 
trades, capital goods of all sorts and grades for number- 
less different purposes, lands varying in climatic and chemi- 
cal and positional qualities, adapted to countless different 
uses and products, and in all conditions of original or 
acquired fertility and exhaustion, and with all kinds of 
improvement and modification through capital and through 
labor — are one and all, through competitive bidding, 
reduced to a certain sort of homogeneity, that is to say, 
to the homogeneity of market price. But all the differ- 
ences between the different productive agents and instru- 
ments still persist. That all are subjected to a common 
price measure, which merely means that all are bought and 
sold, does not obliterate these differences or reduce all pro- 
ductive facts to an abstract fund. In truth, money and 
loan fund, — deferred options of disposing of wealth and 
services, suspended purchasing power, — are the only cases of 
abstractness or of true homogeneity known to economic 
affairs. We have already had some occasion, and shall 



RENT AND COST 287 

later have yet more, to notice that not even in point of 
utility do equal market values express or suggest equiva- 
lence. That the same man pays $500 for a furnace, a further 
$500 for a piano, and a third $500 for a back kitchen to 
his house, does not point to any actual or expected equality 
of service from the different lines of expenditure ; still less 
do equal outlays by different men. 

Nor even by an appeal to margins is the case for 
equality made stronger. That each of these three uses is 
marginal in the sense of being the last item that one would 
purchase at the price, may be merely derivative from the 
fact that each is the last that one would purchase at any 
price ; and it may still remain true that one would, if 
necessary, have paid indefinitely more for each of the three 
things than was actually paid. 

And still clearer is it that as between different men — 
simply because they are different and essentially incom- 
parable in their mental states, to say nothing of differences 
of wealth and poverty, sickness and health, culture and 
crudity, vivid feeling and obtuse feeling — all utility com- 
parisons fail utterly and hopelessly; there is no homo- 
geneity possible here but this of purchasers' offer or of 
purchasers' actual payment, — either one a mere price homo- 
geneity. 

And all of this holds — and this is our point of goal — 
for production goods as truly as for consumption goods, 
though admittedly in less marked degree. Men as pro- 
ducers are dissimilar, not merely in intelligence and in 
special aptitude, but in wealth, in credit, and in degree and 
quality of objective material equipment. Production goods 
take on a different relation to different entrepreneurs 
accordingly as these entrepreneurs are different in their 
aptitudes, their purchasing power, their lines of produc- 
tion. Even were all goods capable of being distributed 
and graded into stocks of similar items, these differences in 
entrepreneur relation would still exist. But, in truth, most 
goods are not so gradable ; even wheat is so only arbitrarily 



288 VALUE AND DISTRIBUTION 

and by overlooking minor dissimilarities and inequalities. 
Thus the purchaser commonly pays less for things than his 
limit price. And there are quasi-rents of production as 
well as of purchase or of sale. What any particular hirer 
or buyer must pay for any particular item of productive 
wealth is — even where frictionless competition is assumed 
— only what the next most capable bidder is willing to pay ; 
the maximum bid of the buyer in question is very prob- 
ably a quite appreciably greater sum; most bargains are 
concluded within an appreciably wide intermediate tract 
of higgling. 

Applying now these principles to the land-margin ques- 
tion, it becomes evident that the margin of market value 
and the margin of personal service do not and cannot 
coincide. With the especial aptitudes or preferences of 
one man for intensive farming, and of another for exten- 
sive farming, and with all the modifications of neighbor- 
hood preference, birth, associations, family, friends, health, 
habit, religion, and the like, it is not at all certain that the 
man upon the lowest-price land, or upon rentless land, if 
there be any, could not and, if necessary, would not pay 
more than he pays. When, after years of profitable farm- 
ing and contented rent-paying at an appreciable sum, the 
tenant falls on death, it may well happen that no new 
tenant can find it to his advantage to make use of this land 
on any terms. Every landlord knows that the rent income 
depends in part upon the tenant and upon the bargain; in 
every rural community the good tenant is as cordially 
sought after by landlords as is the good landlord by 
tenants- Never is the payment a trustworthy measure of 
the service of the land to the tenant, or, in the absence of 
this particular tenant, of the revenue, under an alternative 
tenant, to the landlord. The margin of occupation is, 
then, not a value margin ; and it is a utility margin only 
with reference to a particular cultivator; the margin of 



RENT AND COST 289 

service may be far beyond and below the ragged, saw- 
edged, market- value line of rental payment. 

A later development of the argument will serve to show 
that precisely here must fail the productivity theory of 
distribution. The remuneration is not the expression and 
equivalent of the value productivity, but is merely the 
market value of the value productivity. But all this must 
await its turn. 

It thus appears that the marginal producer of any 
agricultural product is as likely to be upon high-rent .land 
as upon rentless land. A fall in price is as likely to 
direct out of agriculture and into some non-agricultural 
employment the- tenant upon the better land or the capital 
upon the better land as the tenant or the capital upon the 
low-priced or rentless land. 

Nor is this at all to deny that rightly understood there 
is, or may be, such a thing as marginal land, land which, 
to the most capable cultivator of it, is barely worth cultivat- 
ing upon no-rent terms ; but it is to deny that this service- 
less land and rentless land are necessarily the same land ; and 
especially it is to deny that a fall in price will necessarily 
send into non-use all land held without rent, or that 
there is any such relation between rentless land and market 
price as is indicated under the Ricardian doctrine.^^ 

" The effects of a price fall upon land-holding are something as 
follows : 

A fall in the value of any one agricultural product will set free 
some land for use in the production of other agricultural products ; 
and when the redistribution in the uses of land has completed itself, 
its final effects will sum up: (i) in a small reduction in the prices 
of all other products ; (2) in the same total of effects upon land rents 
in general as would follow from a small fall in the value of agricultural 
products in general. 

Going more into detail, it may be said that a fall in the price, say, 
of wheat, will have as result a rise in both the extensive and the 
intensive margins of cultivation ; that is, there will occur some outflow 
of labor and capital from all grades of wheat land into other employ- 
ments, both agricultural and non-agricultural. But it is only by land 
somewhere becoming vacant that landlords are likely to lower their 
rents. Non-marginal lands will, however, remain only temporarily out 
of cultivation ; less than the old rent is better than no rent at all. 



290 VALUE AND DISTRIBUTION 

We approach now a question which has been much 
debated, but which should not, at the present stage of the 
discussion, occasion great difficulty: Does the rent which 
land is worth for another crop enter into the cost of the 
crop actually produced ? ^^ 

The following propositions may perhaps now be taken 
either as proved or as requiring no proof : 

The rent paid for land used for wheat is a part of the 
cost of production of the wheat. The method of Marshall, 
Hyde, and Hollander,^^ of appealing, for a rentless price- 
But with the redistribution of holdings and of lines of production, some 
cultivators having abandoned agriculture, the vacated better lands will 
be re-rented to cultivators variously selected. No-rent lands — or lands 
as near to this as cultivated lands ever get — may have been in the 
possession of tenants some or all of whom could afford to pay an appre- 
ciable rent ; these lands and their tenants may be undisturbed by the 
fall in price, all the while that cultivators may have been moving off 
from better lands, driven therefrom by the inflexibility of landlords in 
refusing to lower the rents, or induced therefrom by the overbalan- 
cing attractions of non-agricultural employments. 

But it is not likely — indeed, it is not possible — that the vacated 
lands be taken up solely by cultivators moving up from the poorer 
or the poorest grades of land ; as rents fall and cultivation becomes 
less intensive, cultivators will turn to farm larger areas of land. 
The final adjustment will, then, sum up at something like this ; that the 
marginal cultivators — on no matter what grades of land — will mostly 
have abandoned agriculture, while all cultivators will, in some measure, 
have diminished by marginal reductions their output per acre; the 
margin of cultivation, both extensive and intensive, will have some- 
what risen ; the methods of cultivation will have moved toward a less 
intensive type, — another way of asserting some measure of capital out- 
flow ; the reduction in the returns of agriculture in general will have 
distributed itself into lower rents for landlords, lower returns upon 
the capital instruments still remaining in production, and very slightly 
lower personal remunerations for the human factor in agricultural 
production. 

But the marginal costs for different products will still be the costs 
at the personal margin on no matter what grades of land. 

^' J. S. Mill, Principles, Book III, chap, vi ; Jevons, Theory of 
Political Economy, Preface, pp. liii, liv ; Patten, Theory of Dynamic 
Economics, p. 78; Hobson, Economics of Distribution, pp. 121-25; 
Macfarlane, Value and Distribution, pp. 130-35 ; and A. S. Johnson, 
Rent in Modern Economic Theory, pp. 78-82, are among the different 
supporters of the affirmative ; see Marshall, Principles, for the most 
authoritative exposition of the negative argument ; also, A. M. Hyde, 
Journal of Political Economy, Vol. VI, No. 3 (June, 1898). 

" Cf. article by J. H. Hollander, Quarterly Journal of Economics, 
January, 1895. 



RENT AND COST 291 

fixing cost, to the intensive margin where no rent is earned 
or paid, is fruitless; cultivators at the intensive margin 
simply substitute labor and instrument outlays for rent 
outlays; there is no occasion for inequahty of costs, or for 
the existence of marginal costs anywhere, by reason of the 
land or rent fact as presented in this view. 

Conceiving all supply-limiting influences as costs, it is 
evident that any reduction, through corn culture, from the 
amount of land to be had for wheat-raising, must neces- 
sarily express itself in a diminished volume of wheat 
product, in higher prices for wheat, and in higher rents 
for wheat lands. But inasmuch as this leaves such wheat 
rents as are actually paid to function as cost items in wheat 
production, no reason yet appears for counting in the 
possible — and smaller — corn rents. 

As a collectivist doctrine the land cost of wheat would 
be found in the displacement of corn; so, in competitive 
production, corn cultivation may be the cultivator's most 
attractive alternative; and, if the case were one of indiffer- 
ence between wheat production, corn production, and non- 
production, he might, with equal accuracy, speak of his 
outlay or of the potential corn as his cost. But this again 
is to call either the wheat re?it or the corn possibility of 
product a cost; it is not to call the corn rent a part of the 
wheat cost. 

In collectivist production the cranberry patch could not 
afford a basis of cost — having, by assumption, no alterna- 
tive use. But in competitive production other competitors 
would pay the cranberry rent, and would thereby impose it 
as a cost upon the renting tenant. In competitive produc- 
tion, then, the presence or absence of alternative adapta- 
tions does not decide the cost problem. Opportunity cost 
for the individual is in his outlays or in their alterna- 
tive applications and is not necessarily a matter of the alter- 
native applications of the production goods.^^ 

" There is no force — and for present purposes, no relevancy — in 
the doctrine that, because the remission of rents would not lower price, 



292 VALUE AND DISTRIBUTION 

To Mill's dictum, "When land capable of yielding rent 
in agriculture is applied to some other purpose, the rent 
which it would have yielded is an element in the cost of 
production of the commodity which it is employed to 
produce," Jevons objects : 

Here Mill edges in as an exceptional case that which proves 

to be »the rule If land which has been getting £2 per acre 

rent as pasture be ploughed up and used for raising wheat, will not 
the £2 per acre be debited against the expense of the production 
of wheat? 

That Jevons has assumed a case of production by a 
cultivating owner somewhat obscures the reasoning. But 
it is clear that if this owner is computing his cost according 
to an alternative product, he must make the displaced 
pasture product the cost of the wheat, and not the rent; 
and if he is computing his cost according to the rent, he 
will find the cost in that rent which, as landlord, he could 
derive from the land by renting it for its most profitable 
use — the wheat use — and not according to some smaller 
rent quantity possibly obtainable for the pasture use; thus, 
in neither case can the pasture rent be a cost. 

Jevons, however, carried his doctrine to its logical con- 
clusion : "When labor is turned from one employment to 
another, the wages it would otherwise have yielded must be 
debited to the expense of the new product." There is 
again the same sort of confusion of thought, but this time 
it is in the failure to distinguish the wages of work from 
the product of work. But as applied to competitive pro- 
duction, Jevons' doctrine amounts to saying that my cost 
is not in what I do pay my men, but in what I might have 
paid them, had I paid them less.^'' 

rent is no part of cost. This would equally well hold to exclude 
interest or wages from cost. And if it be urged, as, for example, by 
Hyde, that there is a marginal subsistence wage which must be paid 
in order that the laborer live, it is, perhaps, fair to reply that the land- 
lord may equally need the land hire in order to live ; at any rate, the 
cancellation of the hire would, as has been already shown, finally 
result in the exhaustion of the fertility of the land. 

" It should be noted that Seligman in his lately published 
Principles of Economics adopts in its most unmitigated form the 



RENT AND COST 293 

Patton's way of putting the case is perhaps its most 
forcible expression: "If the marginal land used for gar- 
dening will yield a rent for wheat, the value of the mar- 
ginal produce of garden products must equal the cost of 
the labor employed plus the cost of the land when used for 
wheat." 

Surely the product must at least equal in value the 
labor wage and the wheat rent; but it must more than 
include the wheat rent; it must include the rent for the 
garden use, which has, by assumption, been important 
enough to displace the wheat use. 

But there is nevertheless, as has already been indi- 
cated, some saving grace of truth in this alternative-rent- 
cost doctrine ; an influence important for the price of 
wheat, and an influence much more nearly fundamental 
than mere entrepreneur outlay, is vaguely in the back- 
ground of the thought. Still, it is not the displaced corn 
rent that makes either the prices of wheat or the rents of 

reasoning of Jevons : "In the cost of the wheat, therefore, must 
always be included the rent which the marginal, or no-wheat rent, 
land would earn if employed for the next lower use" (p. 377). 

And Jevons is likewise followed in his confusion of rent with 
displaced product : 

"Furthermore, not only must the marginal rent [the displaced prod- 
uct?] always be included in cost, and therefore in price, but in a higher 
sense the differential rent as a permanent phenomenon is also a part of 
price. The rent of anything is its product. [True only when product 
is used in another connection and in quite a different sense, as dis- 
tributive value share.] The greater product of the better land forms 
as much an element of the supply as the smaller product of the poorer 
land, and price depends on the relation of the total supply to the total 

demand Price is not fixed- by the marginal or maximum 

cost but at the marginal cost, and the margin depends upon the out- 
put of the better grades, receding as this increases, advancing as it 
falls. Every bushel of wheat, whether it comes from good or poor 
land, affects the supply, the price, and the margin." 

Now note the argument : The rent on land is a price-determining 
fact, because the product of the land is a part of the aggregate com- 
modity supply. But the objection immediately arises that in this 
higher sense — a view which emphatically deserves far more extensive 
and more thorough development than it has yet anywhere received — 
no cost of any sort, but only product, has anything to do with price. 
And in last analysis, truly, products are not to be explained by remun- 
erations, but by supply of agents ; the supply of products, being deter- 



294 VALUE AND DISTRIBUTION 

wheat land higher, nor is it the land which might have 
been used for corn but instead was used for wheat that 
makes wheat prices and wheat rents higher — for precisely 
the contrary is the fact — but it is the limitation upon the 
supply of wheat lands by virtue, among other causes, of 
the use for corn-growing, that makes the supply of wheat 
smaller, thereby the prices higher, and thereby again the 
wheat rents higher. 

And once more be it repeated that rent is not the ulti- 
mate cause of price ; rent in any line of production is 
merely the entrepreneur expression of the limited quan- 
tity of agents accessible for that industry. But in principle 
all this holds equally of wages and of interest as costs ; 
the relative scarcity of productive agents renders the 
products relatively scarce, thereby the prices high, thereby 
the remunerations for the agents high. The high remun- 
eration is cost, in the sense of a supply-limiting fact, only 

mined by the supply of agents, determines in turn — on the cost side 
— ^the value of the product ; and the value of the product in turn 
explains the remuneration of the agent. But this is all on a level 
underlying the shallow entrepreneur-cost analysis — the merest super- 
ficial adjustment working within, and controlled by, the larger situation 
facts — and excludes all remunerations from the category of causal 
factors ; the argument is thus not good to include rent equally with 
wages in cost, but to exclude, together with the entire cost computation, 
all of the different subheads and factors of cost from the category 
of value-determining influences ; under this analysis, both rent and 
interest appear as results of value, as mere distributive shares. That 
is to say, not rent, but the lands — their scarcity ; not wages, but the 
supply of labor, must explain the limited volume of product and the 
value derivative from this limitation. And so bearing in mind that 
wages produce nothing ; that land, and not rent, has productive power ; 
that land is one thing, and the rent of it another and a quite dis- 
tinguishable thing, we are in position to appreciate the infinite confusion 
of fundamental standpoints and of derivative analyses involved in our 
author's argument as it continues (the italics are the present writer's) : 
"The rent of the better instrument is the product of the better instru- 
ment. Each unit in the supply is a part of the total product or total 
rent, and must therefore affect the price. Hence the rent or product 
of any instrument of production, whether it be land or capital or 
labor, whether it be marginal or differential rent, is really an element 
in the price, in the sense that, were it not for that product, the price 
would be different. Land is here in precisely the same position as 
other things" (p. 379)- 



RENT AND COST 295 

as, under entrepreneur production, it is the result and the 
expression of a relatively limited supply of agents. 

And now we are in position to estimate the measure of 
truth contained in the view that, the market value of agents 
being fixed, and the market opportunities ■ and burdens 
being common to all entrepreneurs, and the entrepreneur's 
personal equation of circumstances and ability being the 
selective determinant of marginalship, entrepreneur differ- 
ences must stand as the only variant in the determination 
of the relative costs. 

Such, indeed, would be the truth, were all industries 
alike in their technological aspects; were labor, for 
example, the only productive agent, or were all industries 
equally capital-using and land-using and labor-using in 
their methods of production. Or the proposition would 
hold, if it were possible indefinitely, — as in large degree it 
is possible, and as at the margin it is practically always 
possible, — to substitute one agent for another, so that no 
relative scarcity of any kind of productive agent could ever 
obtain. 

But as the case actually stands, peculiarities of adapta- 
tion in productive agents, and peculiarities in entrepreneur 
ability and adaptation have both to be accepted as funda- 
mentally directive situation facts for the supply side of the 
value equation. 



CHAPTER XVII 

THE MODERN MOVEMENT 

marginal utility and subjective value 

(boehm-bawerk and von wieser) 

In English, and especially in economic usage, the word 
value connotes relativity. Seemingly, this does not hold, in 
the German Sprach-Gefiihl, for the German term Wert. 
Hence, translators of German economic literature and 
expositors of German economic doctrine have to choose 
between rendering the one German word Wert into the 
two English words, worth and value, as occasion may 
require, as against attempting to make the one word value 
serve as the English equivalent of both the relational and 
the non-relational senses of Wert. 

In employing the two terms in English, there is the 
obvious advantage — if only the changes and shades of 
meaning in the German are correctly distinguished and 
reported — of leaving less occasion for ambiguity and con- 
fusion in the English readers' attempt to follow the Ger- 
man thought. On the other hand, there is equal danger of 
making distinctions where there were none in the thought 
of the German author ; and if it should turn out to be true 
that the use, in the German, of the one word for two 
unrelated concepts has been a prolific source, not merely 
of misinterpretation from the outside, but of confusion and 
inaccuracy in the original thought, there is the added 
danger that the two words in English should import a 
clarity which is not in the original discussions, and should 
make gratuitously difficult the task of understanding how 
these confusions and inaccuracies have been occasioned. 

However, there is nothing for it but to make the best 
compromise possible. Wherever in the following discus- 
sions the word zvorth is used, it may be taken as clear that 
the use of Wert in the original is non-relational. 

Wert in the subjective sense is the significance which a good 
or a complex of goods possesses for the well-being of an indi- 

296 



THE MODERN MOVEMENT 297 

vidual Objective exchange Wert is the ability to com- 
mand in exchange a quantity of other economic goods.^ 

Boehm-Bawerk regards this objective Wert as a quality 
attached to the good, and as without any necessary impH- 
cation of service to the well-being of any individual; the 
concept is of a purely objective fact — the power of 
purchase — Kraft. There is, in fact, said to be no possi- 
bility of rendering subjective Wert over into objective 
Wert; though the first may be used to explain the second, 
there must be a distinct theoretical system for both. But 
"that two so distinct subjects must be handled under the 
one name of Wert is unquestionably a source of great 
danger." ^ 

A good may stand as more than the service ful cause — 
it may be the necessary condition — of human well-being; 
herein lies the distinction between utility and worth. Worth 
implies that 

with the possession or the loss of the good a satisfaction 
stands or falls When, with a good, an item of satisfac- 
tion, well-being, pleasure, is at stake, then will the effective interest 
we take in our own well-being be transferred to the good which we 
recognize as the condition; in it we respect and prize our own 
welfare.^ 

Nor is the notion of cost a necessary element in the 
worth concept; worth might exist with goods supplied by 
the bountry of nature, if only the supply were limited. 
Worth implies merely "that importance which a good or 
complex of goods, as the recognized condition of an other- 
wise absent utility, acquires for the well-being of an 
individual." * "The measure [das Mass] of the dependent 
service is everywhere the measure [das Mass] of the worth 
of the good." ^ 

'^ Eugen V. Boehm-Bawerk, "Grundzuge der Theorie des wirtschaft- 
lichen Werts," p. 4. (Conrads Jahrbucher, 1886, neue Folge, XIII, 
pp. 1-82, 477-541). 

^ Ibid., p. 7. * Ibid., p. 13. 

^ Ibid., p. 9. ^ Ibid., p. 20. 



298 VALUEJAND DISTRIBUTION 

Notice that, despite the everywhere, there is here no 
thought of markets and of exchange ratios, but only of 
the service to the individual; nor, in fact, is there any 
implication or suggestion of the quantum of one dependent 
satisfaction relative to some other satisfaction, no compari- 
son of one service with another, or of one necessary condi- 
tion of satisfaction with some other necessary condition. 
The thought goes solely upon absolute magnitude of feel- 
ing; worth, or subjective worth, or subjective value, in 
Austrian usage — these terms are really interchangeable — 
is the significance attached to the means, as the indefeasible 
condition upon which the feeling magnitude is recognized 
to be dependent. It is absolutely essential that this fact 
be grasped and firmly held; the Austrian doctrine is either 
nonsense or hopeless error otherwise: 

I say advisedly and with casuistic caution, the entire theory of 
subjective Wert is nothing more than a great system of casuistry 
as to when, under what conditions, and to what extent, our well- 
being depends upon a good." 

And keeping in mind that the subjective worth of any 
good is measured by the need that without the good must 
go unsatisfied, it follows that no one item of a stock of 
goods can have a greater worth than that measured by the 
weakest desire ministered to by any item of the stock; 
so one item of a non-important class of goods may outrank 
another item in the most important class : "Not every peak 
of the Alps is higher than any peak of the Pyrenees;" all 
of which says that "the worth of any good is determined 
according to the magnitude of its marginal utility" 
(Grensnutsen) ."^ 

It follows that it is equally as false to measure the 
worth of one item according to the importance of its class 
of goods, as to measure the importance of the class 
according to the importance of the marginal item; the 
particular item, as item, or the group, as group, must get 
its worth according to the utility dependent upon it. 

Obviously also the height of the marginal utility, the 
subjective worth of any item in a stock of goods, must 

" Boehm-Bawerk, op. cit.,p. 20. ''Ibid., pp. 22, 29. 



THE MODERN MOVEMENT 299 

depend in part upon the degree of the individual want, in 
part also upon the size of the stock of goods. And here 
follows doctrine invaluable for future purposes : 

Since the relation of needs and provision may be extremely 
different with different individuals, it follows that one and the 
same good may have many different degrees of subjective worth 
for different persons, a fact, in the absence of which the existence 
of exchange would be absolutely unthinkable. Thus, in otherwise 
similar circumstances, the same quantity of goods has for poor and 
rich a different worth — lower for the rich, higher for the poor.^ 

Now passing over for the moment, as does Boehm- 
Bawerk finally, the difficulty of making utilities for differ- 
ent men commensurable or even comparable, and assuming 
this difference in worth for the rich man as compared 
with the poor man, we stop to note that each of these 
cases of worth is conceived by Boehm-Bawerk as a quan- 
tity of absolute magnitude, a matter in each case of the 
intensity of the need depending for its satisfaction upon 
the good in question. But the difficulty remains that 
solely upon the basis of these absolute magnitudes, no 
exchange can ever be worked out; if otherwise, there 
would never be any end to the exchanging between rich and 
poor. That they exchange, the poor man a horse, and the 
rich man a cow, gives no evidence of the importance to 
either man of either the horse or the cow, and indicates 
only that to one the horse is more important than the cow, 
to the other, the cow more important than the horse; that 
is to say, an exchange can take place only because the two 
traders differ in their estimates of the relative importance 
— the relative marginal utility — of the items under con- 
sideration, differences not of subjective worth — these of 
themselves would be irrelevant — but differences in relative 
subjective worth. 

All this has, of course, nothing to say as to the impor- 
tance or the accuracy of the Austrian concept of subjective 
worth, but refers only to the relation of this concept to the 
phenomena of markets and of market values. 

Nor, in view of occasional passages in Austrian discus- 
sion, particularly in the work of Boehm-Bawerk, is it open 
to doubt that, upon occasion, full recognition is accorded in 
Austrian theory to this obvious fact of doctrine. But it is 

* Ibid., p. 41. 



300 VALUE AND DISTRIBUTION 

equally clear that the general trend of the discussion and 
of the terminology is the other way; the above-quoted pas- 
sage is one out of numberless instances in which subjective 
worth is treated as relative, without explanation or apology 
and by mere assumption, or is out of hand asserted to be 
identical with market value — this last to the degree that the 
general understanding of Austrian theory has come to be 
that it explains market value by marginal utility, and 
resolves market value into marginal utility. 

But that subjective worth is alone inadequate to explain 
exchanges, that by each trader two subjective worths must 
have been compared, and a choice between them made, that 
is, that subjective worths, absolute magnitudes, must be 
put into terms of relativity — must undergo the valuation 
process, before on either side a readiness for exchange 
can be reached — is entirely clear. No one is ready to trade 
by the mere fact that he has made an estimate of the 
importance to himself of some one particular article — has set 
a worth upon that article ; he must have done a similar 
thing for that other article, the quid pro quo, else there 
can be no basis for finding a balance of gain in the 
transaction of exchange. 

But now recurring to the basis — if basis there be — for 
comparing, in terms of more or less, utility to one person 
with utility to another person, it must be admitted that the 
naive common-sense of the case is with the Austrian 
assumption. It does appear to mean something when a boy 
asserts that a blow hurts him more than it hurts another 
boy, or when it is said that music gives one man more 
pleasure than it gives another, or that the higher orders of 
life feel pain more intensely than do the lower. Just what 
or how much this naive deliverance may signify is a ques- 
tion rather for the psychologist than for the economist; 
but that there can be, at the most, only a vague and inac- 
curate comparability and commensurability, is apparent; 
there is little promise here of scientific service.^ 

The truth probably is that, in the final and ultimate 

" "Ah, sir, a distinct universe walks about under your hat and 
under mine — all things in nature are different to each — the woman we 
look at has not the same features, the dish we eat has not the same 
taste, to the one and the other ; you and I are but a pair of infinite 
isolations, with some fellow-islands a little more or less near us." — 
Thackeray, Pendennis. 



THE MODERN MOVEMENT 301 

psychological analysis, the more or less in these cases is 
itself essentially relative ; to say that a thing pains me more 
than it pains you is true only with the reference and with 
the limitation of my larger or smaller capacity, my powers 
of endurance and of self-control, and the intensity of my 
coexisting sensations, perceptions, and emotions ; that is 
to say, the comparison of my pains and yours is a matter 
solely of the relative importance of these quantities, each 
as parts of two distinct sensational and emotional situations 
and systems ; that my more is more only in the sense that it 
is, as a question of proportion, a larger share in my emo- 
tional system, — is a greater quantity as matter of proportion, 
the things being compared only in this aspect of ratios 
to the other facts in their respective sensational and 
emotional environments. 

But with the recognition that, as applied to items of 
demand or to items of supply, subjective worth is an 
irrelevant concept until carried oyer into a comparison of 
two subjective worths — into a subjective valuation — that 
is, with Austrian theory interpreted at its best, it becomes 
true, and is to be regarded as one of the chief merits of the 
Austrian analysis that this difficulty as to the comparability 
of the mental states of different men disappears ; the ratios 
of equality or of inequality can be compared, entirely 
irrespective of the quantities constituting the ratios.^*^ 

But there still remains the problem as to how the dif- 
ferent feelings of the same individual, at any particular 
time and in any given set of circumstances, are somehow 
reduced to a common denominator and made commen- 
surable; and here the discussion of Boehm-Bawerk is, in 
the main, admirably convincing: 

Are feelings in any wise rational facts, and, even if so, 
are they susceptible of rational measurement and com- 

" The difficulty disappears for value theory, in the restricted 
sense ; but it is not so clear that it does not persist for the theory of 
interest. For, if my emotional quantities are not comparable with 
yours, how comes it that my emotional quantities of today are com- 
parable with those of a week or a year hence ? It is, perhaps, enough 
that each individual does somehow make the comparison, in a manner 
satisfactory to himself, and that with what justification and with what 
measure of accuracy or of error need not concern the economic inves- 
tigator. Perhaps it is enough that different situations appeal with 
different degrees of strength to present will and choice. 



302 VALUE AND DISTRIBUTION 

parison? Can whimsies be subjected to appraisal, so as to 
stand in mathematical relations of beauty, agreeableness, 
or sweetness, — this person or thing one and one-half times 
as beautiful or as beloved as another, etc. ? Well, if, at least 
in some crude but effective fashion, they were not so, no 
economic life would be possible ; there could be no principle 
of greatest pleasure with least pain; if we were unable to 
posit the greater here and the less there, we should have 
no way of deciding which desire to satisfy or to provide 
against. Somehow we do the thing. The pleasure from a 
cold bath is sufficiently unlike that from a symphony con- 
cert, and both from that of satisfying hunger or thirst; but 
we know right well at any given time which pleasure is the 
greatest [which opportunity most attracts us]. Likewise 
the toothache is a different sort of pain from a pin prick; 
but we are able to decide which is the greater matter. 
Somehow we arrive at a decision whether, with a scant 
supply of water, to use it for drinking purposes, or for 
watering the crops. That we have an economic life is the 
proof that we do find a basis of commensurability, or at 
least of approximate comparability. We do decide that one 
pleasure is, in a general way, greater than another. 

But after all, can we arrive at the conclusion that one is 
greatly better, or moderately better, or, again, only incon- 
siderably better or greater than another? Can we get at it 
in any accurate way, even to mathematical precision, so 
that pleasure A may be pronounced to be, say, three times 
as great as pleasure Bf We certainly do it, and we do 
certainly express ourselves in this precise way, although 
the quality of the process may not rationally justify the 
preciseness in the statement of the result. How otherwise 
should we trade? A boy is about to buy some fruit; he 
may have for his money one apple or six plums. He does 
in fact compare the pleasures ; and in getting at a decision, 
he must do more than decide that he likes apples better 
than plums; he must decide whether he prefers one apple 
to six plums, or six plums to one apple. Or if two boys, 



THE MODERN MOVEMENT 3^3 

A and B, are trading plums for apples, shall A accept the 
offer of three plums for one apple? Take it that he refuses 
successive offers of three, four, and five, but accepts the 
offer of six; all this is nothing else than a judgment on 
his part that the pleasure from the offered good is or is not 
greater than the pleasure obtainable from the quid pro quo 
to be rendered. 

And it is plain that if we can call an apple worth three 
plums, we can call a plum worth one-third of an apple. 
We do arrive at mathematical statements, precise, definite 
ratios ; and so it is perhaps true, as von Wieser insists, 
that all of these relations of greater and of less worth 
finally trace back to relations of equality. 

But we remark that while all this is, in the main, as 
convincing as it is clear in statement, there are nevertheless 
some implications in it to call for question. The dubious 
aspect of it all is that it all sounds in terms of pleasure and 
pain, the comparison of pleasure with pleasure, or of pain 
with pain, or of pleasure against pain. It is true that this 
is not peculiar to the Austrians, — to the utility school, so 
called, in economic thought; it is characteristic of all or of 
nearly all of economic discussion present and past. But it 
is the more manifest that with the rapid movement in 
psychological opinion toward what is termed the "volitional 
or functional psychology" as distinguished from the pas- 
sive or associationist point of view — the newer insistence 
upon impulse and instinct in human activity as against 
calculating and reflective choice — there is becoming increas- 
ingly clear the necessity for reformulation of the funda- 
mental assumptions of economic theory. The process of 
valuation is distinctly a psychological phenomenon, and the 
problem of value is the fundamental problem in economic 
science. It may not be too much to say that the next 
line of advance in economic theory will be distinctly psy- 
chological in character, and that further progress awaits 
its new impulse at the hands of the psychologist. 

It must be admitted that in all fields of investigation, 
other than jurisprudence and economics, utilitarianism 
stands as a point of view discredited and outworn. How- 
ever defensible this laggardness may be for a science where 



304 VALUE AND DISTRIBUTION 

the question is merely, as in jurisprudence, on what reason- 
ings have legal precedents and legal institutions been 
worked out, there can be in utilitarianism no resting-place 
for those sciences which, like economics, ask not what 
opinion the doctors of the science have held concerning the 
facts, but what objectively are the facts. Economics must 
keep itself abreast of modern thought or, at the worst, must 
more or less belatedly follow after. The preliminary step 
is, then, to recognize that utilitarianism, or any form of 
hedonistic theory, is a thing of the past. 

It is precisely from this point of view that the Austrian 
school comes seriously under suspicion. Whether it be 
by necessity and fundamentally, or merely through ter- 
minology and gratuitously, there is overmuch flavor in it 
of Benthamism, too much talk of utility in the sense of 
pleasure, and too much analysis of market activities in the 
aspect, not merely of egoistical and cool-headed farsighted- 
ness, but also of calculations worked out under a com- 
mon denominator of utility for feeling — "pleasure by the 
shilling's worth." 

This is, in any event, if not bad doctrine, at least ques- 
tionable and unnecessary doctrine. It lacks catholicity. 
There are too many thinkers who believe that men sell and 
buy economic goods from impulse and habit and irreflec- 
tion — that instinct and appetite and spontaneity manifest 
themselves in the economic world as truly as in the world 
of play or romance. There are those going even so far as 
to say that primarily we do not desire things because they 
give us pleasure, but that they give us pleasure because 
we desire them. Just as the chicken pecks its way out 
of its shell without foreknowledge of the glories of the 
outside day, and, immediately upon exit, picks up a grain 
or two of sand, nowise interested in the nearby gratification 
from its pungent flavor or in the far-away joys to accrue 
from a well-sanded digestion, just so human instincts and 
tastes and impulses reach their time, and spontaneous 
activities press forward to expression; rattles wane and 
dolls wax, while in later succession sleds and canes and 
sweethearts and homes and offspring and offices and pro- 
fessorships crowd upon the stage of human activity. 
Things move from indifiference through gratification to 
satia,tion, as men change in their equipment of desires and 
tastes and sympathies; and, when a thing comes to give 



THE MODERN MOVEMENT S^S 

us pleasure, it does so merely because we have come to 
like it. As one wakes in the morning according to the 
inner time-lock which he set at bed-going, as the hypnotic 
patient carries out, days later, the mandate given during 
his forgotten trance experience, as the idee fixe of patho- 
logical mental conditions, or even of habit, guards one 
against all influence of argument or appeal, as the resolve 
of yesterday remains by that mere fact the cherished goal 
of today, so do all of us, in a wide domain of our activities, 
move in a half -blind trance of inherited impulses and 
instincts and of acquired tendencies and aims. So much of 
our action is essentially reflex that there is more question 
whether any of it is altogether calculated and purposeful 
than whether all of it is. 

Boehm-Bawerk insists that we could not choose if we 
could not measure exactly. Possibly so ; it is, however, 
important for the economic life only that we choose, and 
it is neither important nor clear that we choose or compute 
or compare in terms of the pleasure or the pain equivalents 
of the goods. It may be that the desire is for the good — 
the commodity, the fact — and not for the pleasure of which 
it may be the key. Possibly enough, the pleasure is a sort 
of by-product, an incident. So one may enjoy the process 
of getting rich rather than the wealth when acquired. It is 
often more important for happiness to have a goal than to 
reach it. Or, doubtless, the desire may reach out solely 
toward the goal.^^ 

The fisherman who, when asked whether he was getting 
any fish, replied that he was not fishing for fish, but for 
pleasure, certainly may have spoken the truth ; doubtless 
some of our activity is worked out under the pleasure 
calculus. But it is equally certain that one may be fishing 
for fish, and not for pleasure ; not all of our action is to be 
reduced to a pleasure-and-pain computation ; there is a 
spontaneous unfolding of activity — the disposition to func- 
tion — the type of action insisted upon in the ethical theory 
called "energism." Play may be its own end and justifica- 
tion, not the pleasure of play; many men keep up the habit 
of living, with all its necessary and incidental activities, 
without attributing pleasure to the parts separately or to 

^^A student reports to me the reply of a petulant and inconsolable 
child : "I don't want nothing ; I just want to want something." Later 
years of life know this feeling better. 



3o6 VALUE AND DISTRIBUTION 

the aggregate, and even under the conviction that Hfe is a 
burden. A race of pessimists might not suffer in numbers, 
as compared with the most devoted of pleasure-seeking 
Epicureans. We seek things because they respond to our 
wants. It is sufficient that the fact be a desired fact, an 
inducing fact, a fact operative to call forth a response of 
will and choice. Who knows that he desires a thing or a 
situation always with a degree of intensity proportioned to 
the pleasure that the fact when attained will give, or is 
expected to give? Is the martyr seeking the pleasures of 
martyrdom? Now and then does not one smoke, at some 
blind "1 must" call of habit, and even with the full knowl- 
edge that the process will not afiford pleasure, and that the 
result will be a headache? Are the desires of sex, or the 
parental instincts and activities, sheer computations of 
pleasure? And if all our rational activities could be justi- 
fied under this hedonistic calculus, and 3'et if this be not, in 
fact, the computation according to which they are under- 
taken, and if many of our activities are not reasoned, but 
are, instead, intuitive or habitual and, in either case, uncal- 
culated, it must follow that another and more inclusive 
formula than that of the hedonist is in need of seeking. It 
is enough that we choose in fine gradations and with clear 
distinctions, and it does not matter whether the measure be 
accurate, the process rational, or the result correct. 

That most of our activity is of the irreflective tradi- 
tional sort is, indeed, admitted by Boehm-Bawerk : "Num- 
berless economic acts are performed purely automatically 
or mechanically ;" ^^ and all choices might be reached in as 
mechanical a way as some are — and as perhaps all really are 
— and yet the economic facts would remain practically 
and theoretically much as now. We do seem to ourselves 
to do some considering ; we might do either more or less 
and still the fact of deciding would remain — choices between 
goods and choices between alternative activities would still 
take place, and our economic theories would still formulate 
themselves very much as they are now formulated. 

I must simply insist with all emphasis that the correctness of 
our measurements does not signify, but only that we make 

them Well or ill the reckoning is done in terms of com- 

mensurability." 

"Boehm-Bawerk, op. cit., p. 49. ^^ Ibid., p. 50. 



THE MODERN MOVEMENT 307 

So it does not much matter for the economic aspects of 
either the older or the newer thought whether one concurs 
in the anti-utilitarian protest. The later investigators, like 
the earlier, appear to be grievously given over to hedon- 
ism; but so have other men been to Methodism without 
obvious disadvantage to their economic theories. So much 
is, indeed, asserted by both Boehm-Bawerk and von Wieser ; 
and one wonders mostly why, if all this hedonism is, in 
fact, so unessential, one finds so much of it.^* And yet it 
may safely be asserted that there is not one single essential 

""Men strive after happiness. This is, perhaps, the most general, 
and certainly the most vague, expression for a complex of strivings, 
all of which have for the object the bringing about of such occurrences 
and conditions as we know and feel to be pleasant, and the avoiding 
of those we know to be unpleasant. Instead of 'striving after happi- 
ness,' we may use the expression 'striving after self-preservation and 
self-development,' or 'striving after the greatest furtherance of life.' 
Or we may, with equal propriety, use the words 'striving after the 
most complete possible satisfaction of wants ;' for the expressions we 
are so familiar with in economic terminology, 'want' and 'satisfaction 
of want,' mean, in the last resort, nothing else than, respectively, the 
unsatisfied craving of man to be put under conditions he thinks desir- 
able or more desirable than those he has, and the successful obtaining 
of such conditions." — Positive Theory of Capital, p. 9. 

"To many of us it seems a positive hindrance to the fair fame of 
political economy now that its professors should talk of a 'calculus 
of pleasures and pains,' as if that were the foundation on which all 
economical theory must rest. If the economist is no longer assumed 
to suppose that all men act only from self-interest in the narrowest 
sense, why should he be supposed to measure only pleasures and 
pains ?"—TBonar, Philosophy and Political Economy, p. 236. 

"The facts are simply these : Every species of wealth is of value 
to us in so far as it helps us to supply some of our wants. These wants 
are of an almost endless variety, and differ very greatly in the degree 

of their importance If any of these wants remain entirely 

unsatisfied, we are to that extent the losers ; and their loss is in pro- 
portion to the importance of the wants whose satisfaction is desired. 
But each of our wants demands only a limited amount of the material 
which is appropriate to its gratification ; and, when this has been 
granted, it demands no more. Moreover, each want can in general be 
supplied in such a way as to serve its purpose moderately well with a 
considerable less amount of material than that which would bring it up 
to the limit at which the demand would absolutely cease. Hence, as 
wealth increases in a particular direction the increments in 
that direction become less and less valuable for the supply 
of our wants. In all this there is no necessary reference 
to pleasure. If the need of living continued, we should go on about as 
before without any connection of pleasure with the gratification of 

want We have seen already wherein the plausibility of the 

doctrine consists. Our end seems plainly to be in the realization of 
something which our nature wants. Such a realization brings pleasure. 



3o8 



VALUE AND DISTRIBUTION 



doctrine in the system that might not, without substantial 
impairment or change of economic bearing, be stripped of 
its psychological or ethical implications. 

For the purpose of the present discussion there is. 

Hence it is very natural to identify pleasure with the realization of an 
end." — Mackenzie, Introduction to Social Philosophy, pp. 215, 216. 

The interrelations of utilitarianism with the associational psy- 
chology, and of the two with the Lamarckian biology, and of the three 
with the notion of thought and feeling as merely material atom- 
activities taking place in the brain conceived as seat and origin of 
thought rather than as mere organ, are all suggestively and effectively 
set forth by Professor Fite in his Introductory Study of Ethics: 

"The hedonistic psychology is that of the associational school. 
According to this school the mind is a series of mental states, of 
quasi-mental pictures, which (a) are various combinations of simple, 
homogeneous mental elements, whose form of combination is (&) 

determined by the order of external stimuli The original 

substance of mind is thus wholly amorphous and indeterminate, like 
the surface of a blank waxen tablet, and mental structure is the 
mechanical result of the impressions left by external objects 

"On first sight human impulses show an enormous variety ; and 
prima facie any impulse would appear to be as real and as elementary 
as any other. But for associational psychology there is no way of 
explaining this variety, except as quantitative variations of a single 
elementary, and hence real, desire, which is then described as a desire 

for pleasure The hedonist finds that the young infant has 

apparently no desires except the sensuous one, and from this he con- 
cludes that the elementary desire is the desire for food and animal 
enjoyment. But according to the evolutionary conception, the develop- 
ment of desire does not begin with the individual infant, nor yet with 
the species ; its earliest stages must be sought among the lower 
animals. Turning his attention, then, still further backward, the 
hedonist finds that the desires of the lower animals are still more dis- 
tinctly sensuous. Sensuous desire then becomes his type or element 

of desire The child .... loves his mother because the 

thought of her suggests all manner of comforts of which she is the 
source; originally she is the source of his food 

"It follows that the hedonist is a believer in determinism as 
opposed to free will 

"The distinction between the two views [Lamarckianism and 
Weissmannism] amounts to this : according to one, the environment 
may initiate a modification (i. e., create an instinct) ; according to the 
other, it can merely restrict the operation of instincts already inherent 
in the organism. 

"But the vital point of the controversy lies deeper. It has to do 
not only with the inheritance of acquired characteristics, but with 
what is implied as to the mode of inheritance of all characteristics. 
The question resolves itself ultimately into this : which is primarily 
and fundamentally responsible for the course of human and animal 
development, the environment or the inherent nature of the organism ? 
Now the Lamarckian places the burden of responsibility upon the 



THE MODERN MOVEMENT 309 

therefore, no occasion to enter into a criticism of the 
Austrian terminology purely in the aspect of its philo- 
sophical or ethical implications. However bad the psy- 
chology of the demand school in economics may appear, 

environment. In other words, it is his object to show that all the 
characteristics of human and animal life are due entirely to environ- 
mental influences 

"From the hedonistic standpoint the fundamental characteristic 
of human nature is its tendency toward passive conformity. There are 
no specific impulses to satisfy, no specific ends to be accomplished ; 
our only object is to make ourselves as comfortable as possible in view 
of the existing conditions ; and provided we are comfortable, it matters 
not what kind of a life we lead 

"The hedonistic theory may then be regarded as a mechanical 
view of conduct. The ethical theory implies immediately a mechanical 
psychology, which attributes all the phenomena of conscious life to 
combinations of simple mental elements ; more remotely a mechanical 
biology which translates the mental elements into physiological 
elements and the law of association into a biological law ; and finally 
a mechanical cosmology which reduces all the reality of the world to 
simple physical elements governed by one physical law" (chap, vii, 
PP- 95-1 1 ij passim). 

Thus all ethical appraisals, whether of approval or of disapproval, 
come to be interpreted as a sort of brain-tissue memory established by 
long experience, individual or racial, into lines of least resistance and 
intimate association between brain centers, in such wise that the facts 
or activities commonly connected in experience with pleasure or pain 
are regarded with approval or with disapproval as the representatives 
or the equivalents of the respectively associated pleasures or pains. 

Among many possible illustrations of the prevailing hedonism of 
economic thought, the following are offered as typical : 

Seager : "The normal purpose of consumption is to afford 
pleasure" (op. cit., p. 67). "The sum of the efforts and sacrifices that 
are involved in production constitute what is known in economics 

as the cost of production Sacrifices, .... the doing of 

things that are less pleasurable than other things that might be done 
but free from any element of pain" (p. 53). 

Seligman : "The motive that guides men in their economic life is 
sometimes described as the economic motive. It may best be defined 
as the motive that compels every human being to satisfy his wants with 
the smallest possible effort, or which leads him to secure the most 

pleasure with the least pain Human beings are impelled by 

other motives as well In searching for the fundamental laws 

of economics it is convenient to exclude all motives save the 
economic The so-called economic man is a complete abstrac- 
tion. By the economic man is meant the human being dominated 
by the economic motive. Such a man does not, however, really 

exist Side by side with the economic life are the aesthetic 

life, the religious life, the intellectual life It is, indeed, the 

function of economics to study that aspect of human life known as the 



3IO VALUE AND DISTRIBUTION 

it can be held to be of disadvantage to economic thought 
only in the sense that it holds the field against some better 
psychological formulation of economic foundations. 

There is, then, no sufficient reason .for quarreling with 
the term utility either on the ground of its distinctly 
hedonistic associations or upon the basis of some other 
word better serving the needs of the case. In truth, the 
better word is not readily forthcoming; and, whatever may 
have been the consensus of use in past economic discussion, 
it remains true that utility does not of necessity mean 

economic life. We must not, however, forget that we are studying 
man in only one aspect of his existence" {Principles, pp. 4, 5). 

"Since value implies capacity to satisfy wants, there are as many 
kinds of value as there are classes of wants. Things have a scientific 
value, an aesthetic value, a religious value, a philosophic value, a 
political value and so on. The value with which economics has to 
deal is economic value, a small subdivision of the whole. As this is a 
treatise on economics, we shall hereafter use the term value in the 
sense of economic value, that is, the value of anything for economic 

purposes When we defined economics .... as the science 

of value, it must be remembered that what is meant is the science 
not of all value, but only of economic value" {Principles, p. 174). 

Taken altogether this appears to mean that the economic motive 
and the economic field include all activity motived by pleasure and 
pain calculations ; but not all human life is so motived, since some 
wants reach toward satisfactions expressive of other sorts of appeal. 
But it is clear that economics is regarded as hedonistic in all its com- 
putations. Were it in any wise relevant to the matter in hand, one 
might stop to inquire whether, by this test, a picture must not be 
excluded from economic consideration, pictures being aesthetic facts ; 
and how is it possible that the redness of an apple should affect its 
market value ? The services and the boluses of the physician are clearly 
enough economic items ; but how about Christian Science healing, and 
about outlays for preaching, and for other ghostly comfort? 

Pantaleoni ; "It is evident that commercial or industrial activity 
or the activity (whatever its nature may be) displayed by men in the 
pursuit of what is commonly termed wealth has no other motive than 
egoism" {Pure Economics, p. 11). 

And if it be true that all action is hedonistic, is it so in the sense 
of the seeking of pleasure and avoidance of pain, or is the calculation 
one not of. pleasure and pain strictly, but only of pleasures and of 
pains? And how does the individual get these different pleasures and 
pains into any common denominator so as to become comparable? And 
is it safe to take pleasure or pleasures to be the algebraic negative 
of pain or pains? 

To some of these questions the safest and simplest reply is 
ignoramus ; and with regard to others it is probably true that for the 
purposes of economics, no deeper knowledge is called for than such as 
shall safeguard the economist from unnecessary pitfalls or from 



THE MODERN MOVEMENT 311 

"importance for happiness" or imply any sort of "pain 
or pleasure calculus." Desirability in the sense of the 
capacity to be desired is inaccurate, while desiredness is at 
least awkward. If, however, one revolts at the use of 
utility and marginal utility, desiredness and marginal 
desiredness may perhaps be acceptable. 

Acquiescence in the term utility carries with it also an 
acceptance of marginal utility. Entirely aside from any 
question as to the dubious purposes to which this second 
term has been subjected in economic discussion, it is clear 
that it stands for an actual fact in individual experience. 

unnecessary choices between competing presuppositions or competing 
schools of ethical theory. 

Pantaleoni {op. cit., p. 26), for example, discusses the question 
whether pleasure is negative pain, or whether, on the contrary, pleasure 
and pain are qualitatively distinct sensations, and inclines, on the 
whole, to the first, the positive-and-negative view, as the better 
explaining the experienced actual comparability and the patently actual 
commensurability of the two. 

The better opinion seems to the present writer to be that pain and 
pleasure are multifarious, pain no more accurately the negative of 
pleasure than is one pleasure or one pain the negative of another 
pain or another pleasure ; and that no item of pleasure is comparable 
or commensurable with any other, or with any pain item, and no item 
of pain like or unlike any other item either of pleasure or of pain, 
in any other sense than that all, as objective facts arousing liking 
or repugnance, must make their separate and respective claims upon 
the will, are thus brought under a common denominator of desire, and 
are commensurable with respect to the strength of the appeal which 
they make to choice, — the relative force of the competing desires to have 
or to avoid. "It is a simple psychological fact that, as we cannot know 
ourselves except in relation to objects from which we distinguish 
ourselves, so we cannot seek our own pleasure except in objects 
which are distinguishable from that pleasure, and which we desire for 
themselves. Desire always in the first instance looks outward to the 
object and only indirectly through the object to the self; pleasure 
comes of the realization of desire, but the desire is primarily for some- 
thing else than the pleasure ; and though it may gradually become 
tinctured by the consciousness of the objective result, it can never 
entirely lose its objective reference. The pleasure seeker is an 
abstraction ; for just in proportion as we approximate to the state of 
the pure hunter for pleasure, for whom all objective interest is lost in 
self-seeking, it is demonstrable by the nature of the case, and shown 
by experience, that for us all pleasure must cease" (Caird, Heget, 
p. 213). 

"We can only have the highest happiness — such as goes along with 
being a great man — ^by having wide thoughts, and much feeling for 
the rest of the world as well as ourselves ; and this sort of happiness 
often brings so much pain with it that we can only tell it from pain 
by its being what we would choose before everything else, because our 
souls see it is good" (George Eliot, Romola, III, 290). 



312 VALUE AND DISTRIBUTION 

Its best illustration is found in the falling intensity of the 
desires of any individual for any given sort of commodity 
at any given point of time. Successive increments of sup- 
ply call forth a continually diminishing response of desire. 
But note that, if the case be not conceived as one of a suc- 
cession of commodity items — if no item be regarded as 
coming early or late as compared with any other, but all 
as portions of a stock already in hand — it is no longer 
ppssible to regard any one item as entitled as against any 
other to the marginal place. Any item may stand as mar- 
ginal in the sense that the loss of it would be felt as 
involving only the utility depending upon it, which utility 
would be equivalent to the utility of the last item in the 
series, were the different items acquired or considered 
successively. 

It by no means follows, however, that each of the items 
is marginal because any one of them may be so. Not all 
of the items of a stock can be marginal at once. The 
utility loss that will be suffered in the loss of the entire 
stock is not the marginal utility times the number of 
items, but the utility of the entire stock conceived as a 
marginal stock. No one item can be regarded as marginal 
excepting on such terms of regrouping as shall impose the 
non-marginal quality upon all the others.^^ 

It needs also to be clearly held in mind that in utility 
schedules we never get beyond the individual, and that 
marginal utility is purely a matter of the individual 
psychology. For different individuals there can be no 

" Wieser appears to be of the other opinion: "The majority of 
theorists .... are agreed that these prices are fixed by a marginal 
law. We, however, have gone still farther, and say that value generally 
and in every form, even that of use, and even where there is no 
exchange .... must obey a marginal law. Jevons, Gossen, and 
Walras have not gone so far as to assert this. To these writers the 
utility of the separate portions or items of one supply is different 

according to the amount of use which each actually gives I 

can scarcely hope to have converted him [the reader] all at once to 
such an unfamiliar aspect of the question" {Natural Value, p. 26, note.) 
But in another note upon page forty-four Wieser states the position again 
in a way to raise the query whether he is not talking about value rather 
than utility. In fact, in the second case he employs the word value 
for seemingly precisely the same meaning as was in the former case 
expressed by utility, the two statements together being perhaps mostly 
serviceable as illustrating the confusion of utility with value character- 
istic of Austrian discussion. 



THE MODERN MOVEMENT 313 

comparison of utilities either qualitatively or quantita- 
tively. As including more than one individual schedule, 
there is, therefore, no possibility of a marginal service in 
the sense of the smallest service of a descending series ; 
there is no series. That A will pay 30 and B 29 in no 
sense implies that the utility to B is to the utility to A 
as 29 : 30. One may be willing to give today for bread 
double what he would have given a year ago, though only 
equally as hungry today. The strength of his desire for 
other things is a necessary factor. Cases are, as we have 
seen, marginal, not in terms of absolute utility, but only of 
relative utility. A wealth of illustrations edifying to the 
point of weariness about the cigar and the loaf. Dives and 
Lazarus, the starving man and the man at feast, ought 
long since to have placed this truth beyond either the 
right or the danger of serious discussion, but have not 
done so. We still hear that stocks of goods in the 
general market may be ranged under one schedule with 
one margin of utility, and that the margin of utility both 
determines and is the market value for all the items of 
the market stock. 

Thus, considered merely as the marginal item in an 
individual schedule, marginal utility becomes no more 
than vaguely quantitative — the assertion of a smaller 
utility than any other in the series. In no degree is it a 
measure of the absolute utility or of the precise ratio in 
utility which any item in the series bears to any other. To 
say that a certain utility is the smallest of a series does not 
imply anything about the size of this utility. The smallest 
potato in the bin may be a very sizable potato. 

From the very fact also that the series is a series, and 
that the very law of satiation which it expresses requires 
that the items of the series be unequal in utility volume, 
there can be no term within the series capable of serving 
accurately as the utility measure of any other. 

Nor is it more defensible to assert that the measure of 
the utiHty is to be found in money. To say that the limit 
price upon a horse for a would-be buyer is 30 means 
simply that at any price above 30 the bidder would prefer 
to reserve his purchasing power for other purposes. But 
it will not do to assert with the Austrians that this 30 
measures the utility of either the goods or the horse. 
There is no such thing as measuring utility in money. 



314 VALUE AND DISTRIBUTION 

All that the price limit of 30 says is that, as between the 
utilities of two things purchasable at 30, to go as far as 
30 for the horse is to reach the point of indifference. At 
higher than 30 something else is preferable. This 30 
mark speaks as to the relative utility — to the particular 
individual — of horses and other things, but says nothing 
as to the absolute utility of the things compared. That 
John is taller than Tom tells nothing of how tall either is. 
Likewise, to assert an equality of utility between two 
things tells nothing as to the absolute utility of either. 
That all the potatoes in a bin are of equal size leaves 
everything in the dark as to the size of any of them. 

It follows that the vague term utility gets quit of only 
one dimension of its vagueness in becoming marginal. 
Nor does the strictly marginal utility — the lowest utility 
of the series — do even this. It is only when a quantitative 
relation of utility is asserted with reference to a commodity 
outside the series — when utility becomes relative — that 
marginal utilit}^, so called, can express itself in price limits 
or become relevant to the phenomena of exchange. ^^ 

" The general relation of utility to wealth and to value may now, 
perhaps, be mostly taken for granted. 

Senior defines wealth as "all those things, and those things only, 
which are transferable, are limited in supply, and are directly or indi- 
rectly productive of pleasure or preventive of pain." Note the three 
requisites: (i) transferability, (2) limitation in supply, (3) advan- 
tage in terms of pleasure or of prevention of pain. 

Enough has been, for present purposes, said of the pain-and- 
pleasure implications of utility. As to transferability it is to be 
objected that while it is evidently an essential condition to market 
exchangeability and thereby an important influence upon the utility of 
any good to its possessor, a thing may yet be useful without being 
transferable, and, if other conditions coexist, may have value to the 
individual. Jevons (Principles of Economics, Macmillan, 1905, p. 3) 
puts the case thus : "Transferableness .... is .... in most 
cases a question of degree. There are comparatively few things which, 

though useful to one person, are absolutely useless to another 

An old family portrait may be more interesting and useful to the 
family than to other people ; but if its painter is of repute and skill, 
it may, nevertheless, be valued by other owners. A rare edition may 
be almost priceless for the book-collector who wants it to complete his 
series, but it may be desired by other collectors with less warmth." 

This is, truly, an accurate paraphrase of Senior (op. cit., pp. 8-10) 
who is cited by Jevons with approval. But clearly enough, the talk 
here is not of transferability in any ordinary sense ; the difficulty is 
not — so far as, in degree, there is any difficulty — that the usefulness 
cannot be assigned, but that there is none to be assigned ; buyers could 
have, if, in their view, there were anything to be had. To others 
than the possessor, the thing in question lacks utility ; they do not 



THE MODERN MOVEMENT 315 

The concept of marginal utility is, beyond question, of 
great significance in economic analysis, though as we have 
seen, and shall repeatedly have occasion to note, it is often 
most disastrously confused with marginal purchaser's price, 
that is, with relative marginal utility, — relative subjective 
zvorth, subjective value. 

But evidently it is only the latter concept that has any 
part or share in the term value as a market category and 
expression of purchasing pOAver. Value in this relational 
sense emerges only when utilities, as an individual cate- 
gory, have been, by different individuals, conceived rela- 
tively to other utilities to be displaced. For different 
buyers the relative utilities of horses to other goods, when 
expressed in terms of money as 30, 28, 26, etc., are purely 
personal estimates as to the utility of horses compared with 
the utility of the things which each buyer must forego in 
the event that he purchases a horse ; and these are marginal 
estimates, since each expresses the purchasing disposition 
pushed to the point of indifference. Each of these money 
statements is, therefore, an expression of subjective value — 

desire. But the next point made by Jevons, still following Senior, is 
valid : "The question, of course, is not one of mere physical trans- 
ferability. There are some things, such as land, which cannot be 
handed about, but can only be transferred in legal possession. Other 
things, for instance, a beautiful voice, cannot be received or parted 
with." 

And just as transferability is a condition neither to utility, nor to 
value in the individual schedule and in the relative sense, but is an 
essential only to exchangeability, so Senior's second requirement, 
limitation in supply, is accurately a condition not to the existence of 
utility but only of utility in the marginal items, or more accurately, to 
utility in all of the items of the stock ; and as condition to marginal 
utility, and thereby to subjective worth, and thereby to the comparison 
of worths, it is finally a condition to the existence of market value. 

There is, however, in the books, much confusion of utility with 
marginal utility ; of this the following cases — entirely outside the 
Austrian sponsorship — may be cited as typical examples : 

"At a given moment there is a given number of units and there 
is but one marginal utility, and this is the same for each of the units. 
It is quite erroneous to say that where there are 30 units, the utility of 
the tenth is 36 ; of the twentieth 25 : of the thirteenth 19. It is equally 
incorrect to say that when there are 60 units, the 'total utility' is 
equal to the area between the right angle and — etc.," "while the value 
is equal to the rectangle, etc." — Fetter, Principles, p. 25. 

From Seligman, Principles, p. 176: "At any given time the utility 
of each apple is equal to that of the last, and therefore to that of any 
of them." 

And Seligman, carrying out the implications of this position, adds : 



3l6 VALUE AND DISTRIBUTION 

not subjective worth, but subjective value, a relational fact 
— money serving as mere equation sign between subjective 
worths of unknown size : x^y, with no notion as to the 
magnitude of either .r or y. Mere marginal utility — sub- 
jective worth, for most purposes (but see later?) — ex- 
presses the utility that is lost in the loss of one item of 
stock. In relative marginal utility, loss in terms of some- 
thing else, the thought is carried over into the field of 
value. 

We are now ready for further additions to our equip- 
ment of terms. Market value is the objective resultant — 
the equilibrium point — of all the different subjective values 
implicated in the market. The marginal traders are those 
with whose subjective valuations the market adjustment 

"The marginal utility of the stock .... is always equal to the 
marginal utility of the final unit multiplied by the number of units ;"or 
as Fetter puts the same view : "The dependence felt by men on the 
group is the product of the units by the marginal^utility" (p. 25). 

It is of course to be objected that the service derived from the 
whole group of units, considered as an indivisible aggregate, or the 
loss which would be sustained by the loss of the entire group is some- 
thing indefinitely greater — possibly infinitely greater — than the product 
of the marginal utility multiplied by the number of units. It is true 
that, taken separately, no one item can have greater importance attached 
to it than has the marginal item, since, when the items are considered 
separately, substitution is possible ; but all the items have not the same 
utility. If it were really true that the utility of each item of a stock 
falls to the level of the last item, and if it were true that the total 
utility of the group is the product of the marginal utility multiplied by 
the number of items, there could never be any utility in any single 
item or in any group of items, so long as the supply were sufficient 
to allow any part of it to be free goods. That is to say, the view 
presented by Professor Seligman permits the emergence of utility only 
as the result of scarcity ; and yet scarcity alone is not sufficient for 
value — else mosquitoes would be valuable in winter. What name 
shall serve to denote the other essential? 

In a general way, the notion of utility is doubtless fairly clearly 
held in economic thought ; and not much needs here be said in this 
connection. Jevon's statement of the case is in the main admirable : 

"Most persons confuse the utility with the physical qualities which 
are merely the basis or requisite condition of the utility. The utility 
of gold, for instance, cannot be said to consist in its beautiful yellow 
color, its ductility, freedom from corrosion, and high specific gravity. 
If these qualities constituted utility, then gold would be useful even to 
the drowning traveler whose pockets are loaded with coin. The 
water of the river in which he drowns would, moreover, be useful, 
because its qualities remain the same as if it served the population of 
a town for drinking and washing purposes. As Senior briefly remarks : 



THE MODERN MOVEMENT 317 

most nearly coincides. For all traders other than the mar- 
ginal there is an appreciable advantage accruing from the 
fact of exchange. These differentials — these distances of 
advantage between the sacrifice which would have been 
consented to, if imposed, and the sacrifice actually consented 
to — are the traders' quasi-rents. 

It is not intended — it would, indeed, be most unfair, to 
imply that everywhere in Austrian discussion this aspect of 
relativity fails of adequate recognition, or that it does not 
occasionally receive expression at the hands of Boehm- 
Bawerk. One wishes merely that this recognition had been 
consistent and firmly adhered to, especially in such authori- 
tative treatises as have been translated into English. But, 

'Utility denotes no intrinsic quality in the things which we call useful ; 
it merely expresses their relations to the pains and pleasures of 
mankind.' " 

Aside from the distinctly hedonistic tone of this formulation, one 
could improve it only by extending its scope ; for it seems to be the 
truth that no quality or attribute — utility or other — is really intrinsic ; 
just as, psychologically considered, sound is not an aerial vibration drum- 
beating upon the organs of auditory sensation — ^but the subjective 
effect or interpretation of the external phenomenon ; and just as heat 
and light and color are psychological significances derived from what 
— supposedly — are objectively mere etherial waves — so all the so-called 
qualities are such only as reported to the mind through a reporting 
mechanism, and as modified and conditioned by the nature and limita- 
tions of this mechanism, and as interpreted according to the activities 
and capacities of the recipient-percipient mind. The ultimate truth is, 
then, that, like utility, all these qualities are such only in the sense of 
relations between the objective fact and the human consciousness; 
there is no place for "intrinsic" qualities anywhere, unless as expres- 
sive of the faith that there is somewhere a reality in itself lying behind 
and upholding the reality as it appeals to us. 

But in view of all this, and of the further truth that all thought 
must run in terms of relation, what does it mean to speak of an 
absolute magnitude of feeling? There can surely be intended no denial 
that in expressing or estimating or appraising the feeling, it must be 
thought of as an experience, and must be understood and appreciated in 
the light of other experiences ; nor is it denied that, for any purposes 
of thought or of action, the feeling must be considered with reference 
to its setting of experiences, and in relation to experience past and 
experience to come. But by the very necessity of this relativity in 
the nature of thought, it is all the while implied that different some- 
things in sensation or feeling exist to be related. Before things can 
be understood, compared, related, thought of, they must first be. Thus 
before a feeling can be decided to be greater or less than another, 
more or less desirable, similar or different, it must have been experienced 



3l8 VALUE AND DISTRIBUTION 

with the accepted terminology of the school, neither con- 
sistency of doctrine nor clarity of exposition was readily 
possible. But more of this later. Our present interest is in 
the working-out by Boehm-Bawerk of the relation between 
subjective Wert and market value. 

Price in German usage indicates merely the quid pro quo 
of exchange. When the exchanged good is money, it is 
accurately to be called the money price. Careful attention 
to this fact is essential, if misinterpretation is to be avoided 
by English readers. 

Fundamental to exchange are^ according to Boehm- 
Bawerk, three assumptions : ( i ) There can be no exchange 
except where exchange brings advantage; (2) the larger is 

separately, and in this sense, absolutely ; it can be a term in a relation 
only on condition of having a separateness, an existence outside the 
relation. One's first experience of any sort must contain its own 
quantum of discomfort or of satisfaction ; it does not need that one 
have stepped on my toe twice, in order that I come to have a first feel- 
ing experience. If pain or pleasure could exist only with a second 
experience, neither could ever exist at all. 

True, one could not appreciate the experience as like or different 
in relation to another, unless upon the assumption of preceding 
experiences with which to put the current experience into relation, 
but he could nevertheless have the current experience and, feeling- 
wise, approve or disapprove of it. It is in this sense that we may 
speak of an absolute magnitude of feeling. 

Nor is there question that in the process of putting these feeling 
magnitudes into relation, in deciding between them, making compari- 
sons of them, some development or modification may take place in the 
terms or in the completeness of the separate appraisals. It is rare that 
one knows precisely how much he would pay for a thing more than he 
actually does pay ; he has never carried the processes of appraisal, 
comparison, and computation farther than to know that the com- 
modity in question signifies to him more than the quid pro quo to be 
foregone. But more and more as the needs of action require, and in 
the process of deciding to act, or in the process of acting, these 
separate and absolute magnitudes of feeling acquire clearer definition, 
both relatively and absolutely ; and it is probable that in the process of 
comparison, the act of thinking things into relation, there may be some 
reaction of one term in the relation upon the other, to modify the 
appraisal of each, not merely in point of precision, of definition, but 
also qualitatively. But not the less must there be two separate 
feeling magnitudes to be compared, between which a relation is to be 
established and a choice declared. These absolute magnitudes, these 
to-be-related significances, are of the general nature, the raw material, 
of subjective worth. 



THE MODERN MOVEMENT 319 

preferred to the smaller advantage; (3) the smaller is pre- 
ferred against no advantage. 

Exchange therefore presupposes that for each trader 
the obtained good affords a greater utility than the good 
foregone, so that, "since the significance of goods for well- 
being expresses itself as subjective value (worth), the 
obtained good possesses a greater subjective worth than the 
released good." ^^ 

It follows that "an exchange is economically possible 
between persons only who appraise commodity and price 

good differently — in fact, in reverse order One 

must appraise the good higher, the other lower than the 
price good." ^^ 

Now, is it true that the good parted with and the good 
received must have the; same value — Wert — since they 
exchange against each other? In the subjective sense, in the 
purely personal appraisal of the traders, no ; for each man 
the worths compared must be unequal to the degree at least 
to tip the scales of choice.^^ 

Here, it is to be remarked, is surely adequate recognition 
of the necessity of getting two subjective worths into com- 
parison, into a subjective-worth ratio, that is to say, into a 
subjective valuation, before either a price offer or a refusal 
price can be reached, and any subjective value come to exist 
in that relational sense affording a possible key to market 
value; but in all the Austrian prodigality of terminology 
there is no term for this valuation relation between subjec- 
tive worths. And note that for any trader, even that one 
nearest the margin, some quasi-rent is asserted ; market 
price can never quite express any margfinal demand ; as a 
ratio, market value is never quite coincident with the mar- 
ginal purchaser's ratio between marginal utilities. Marginal 
buyers and sellers are those who, at the market adjust- 
ment, approach nearest to indifference, — whose utility-ratios 
between goods obtained and goods foregone are nearest to 
being expressed by the i : i ratio: "That bidder is the 
strongest [tauschfdhigste] who appraises his own good 
lowest relatively to the good offered, or, what amounts to 

" Boehm-Bawerk, op. cit., p. 480. ^'' Ibid., p. 490. " Ibid., p. 490. 



320 VALUE AND DISTRIBUTION 

the same thing, appraises the offered good highest rela- 
tively to his own." ^° 

And here follows the familiar illustrative scheme — with 
the horses — for the working-out of the price adjustment, a 
method too familiar to require attention for present pur- 
poses; but it is nevertheless worth remembering that it is 
all worked out in terms of money against goods.^^ 
From this analysis several principles are deduced: 
Which of the bidders succeed in trading? The five 
buyers who appraise the horses highest, and the five sellers 
who appraise the horses lowest. 

But here again the relativity is forgotten; the appraisal 
cannot be in terms of mere subjective worth, else no 
exchange could be deduced as possible. The lowest and 
the highest should have been expressed as relative to the 
medium of exchange, or as relative to the price commodity 
on the other side. Simply as an expression of marginal 
utility, nothing is to be arrived at. 

The height of the market price is Hmited and fixed by the 
height of the subjective worth estirrlates of the two marginal 

22 

pairs. 

The unfirm grasp of the relativity principle is at this 
point suggested by the vague and halting quality of the 
statement; worth appraisals or worth estimates (subjective 
W ertschdtzungen) can rightly mean not mere recogni- 
tions of subjective worth, but valuations of subjective 
worths, comparisons made between subjective worths. 

And it is further to be objected, (i) that the formula- 
tion misconceives the relation of the marginal traders to the 
other traders and to the process of price adjustment; the 
marginal buyer or seller shows merely the degree or extent 
in which he, or any other trader, has individually affected 
the market outcome; (2) not the two marginal pairs, but 
one marginal pair, not four persons but two, give the 
breadth of the margin interval within which the price is 
indeterminate and left to higgling for its adjustment. A 
point may easily be fixed between two points ; but precisely 
how a point shall be fixed between four points is not readily 
clear. 

^' Boehm-Bawerk, op. cif., p. 491. 

^ I bid. J pp. 493-96. ^ Ibid., p. 501. 



THE MODERN MOVEMENT 321 

All of this process and the outcome of it trace back, 
Boehm-Bawerk asserts, to subjective value (Wert) as the 
ultimate explanation : 

The relation between commodity and price good is it [which 
distinctly is not subjective worth, but a relation between subjective 
worths] that decides the individual to take steps looking to an 
exchange, decides as to the degree of the exchange disposition, 
decides sharply up to what point the interests of each bidder will 
lead him to compete, and likewise the limit at which, as outbidden 
and excluded bidder, he must retire from the competition; decides 
in its further effect who, in the scale of strongest bidders, will suc- 
ceed in trading, to whom the role of marginal pair [note the 
singular] will fall, and thereby also the height of the price at 
which the exchange shall take place.^^ 

Subjective worth does, in fact, none of these things; 
and even the subjective valuations do not do the last. But 
forthwith the exposition relapses into accuracy : 

We can with entire precision describe the price as the result of 
subjective worth appraisals of commodity and price good, as these 
appraisals meet each other upon the market.^ 

Nothing having yet been said as to the relation of 
demand and supply, we have now to inquire "from what 
circumstances it is decided whether the worth-appraisal 
level [Schdtstmgsniveau] of the marginal pairs is high or 
low." 25 

There are four forces or facts making for the deter- 
mination of the price: (i) the nature of the demands 
directed upon the commodity; (2) the height of the appraisal 
figures (Schdfsungssiffern) on the part of the buyers; 
(3) the number of wares for sale; (4) the height of the 
appraisal figures on the part of the sellers : 

But .... our appraisal figures are not simple magnitudes. 
They are in no sense simple data as to the absolute magnitude of 
the subjective Wert which the commodity has for the appraisers, 
but rather they are relative quantities derived from the comparison 
of two separate Wert-appraisals, the appraisals of commodity and 
of price good. In saying that A appraises a horse at 200 florins, 
we have said and implied nothing as to what absolute importance 

^Ibid., p. S03. ''*Ibid,, p. 503. '^ Ibid., p. 509. 



322 VALUE AND DISTRIBUTION 

the possession of a horse has for A but, on the contrary, we have 
merely expressed the relation in which the Wert of the horse 
stands for A in relation to the Wert of the money-price.'" 

It must be admitted that this is accurate, adequate, and 
admirable; and if the terminology were adapted to the 
doctrine, and the doctrine adhered to without vacillation, 
and were the exposition consistent and free of confusion 
both of thought and of terms, nothing better could be 
asked for, so far as this aspect of value doctrine is con- 
cerned. But it is equally true that so stated and inter- 
preted, no Ricardian would ever put the doctrine in issue, 
excepting possibly as to the importance of the conclusions 
and the justification of the attendant much talking. The 
Ricardian is, as we have seen, overdisposed to assume that 
the demand can be taken for granted, without analysis and 
without saying. 

But Boehm-Bawerk also, under force (3), "the number 
of wares for sale," recognizes that cost influences await 
investigation. 

COST OF PRODUCTION 

In truth, the Austrian analysis of subjective worth has 
not yet been fully presented. Bearing in mind that "a good 
which one already has he appraises according to the loss 
(Einbusse) which he would suffer by the loss of it," ^^ a 
principle of substitution has to be recognized. The loss of 
any particular good, say of an overcoat, is not commonly to 
be measured according to the utility of the overcoat, but 
according to the utility of the good which will have to be 
foregone in order to replace the overcoat.-^ 

It is by virtue of this doctrine of substitution that goods 
of highest necessity, food, clothing, and the Hke, command 
so limited an appreciation in point of worth. But obviously 
the principle does not apply when the loss, if shunted off, 
would fall upon something not less but more important; 
when, in short, the lost good is itself marginal. Substitu- 
tion through reproduction really falls under this general 

^ Boehm-Bawerk, op. cit., p. 509. 

'"Ibid., p. 33, note. "^ Ibid., p, 36. 



THE MODERN MOVEMENT 323 

principle of substitution, and furnishes the theoretical basis 
for the bearing of costs upon subjective Wert. The loss is 
always that smaller loss into which the loss in question may 
be translated.-'' 

There is no objection fairly to be made here; 
the valuation process is unquestionably of the sort stated. 
But- it is none the less in point to note the necessary impli- 
cation that, whatever may be the truth as to market value, 
subjective value {Wert) is hereby made a question not of 
marginal utility but of marginal cost, marginal displace- 
ment. Subjective Wert is then badly presented when, as 
over and again in Austrian discussion, it is made exclu- 
sively a question of marginal utility. When, for an over- 
coat, for which, by virtue of its utility, one would pay if 
necessary $20, one actually pays only $10, he is justified in 
placing the value of the coat at $10 ; but not the utility ; the 
utility is still the twenty-dollar quantity, and the purchaser's 
differential, the utility gain, the quasi-rent, is thus $10, 
simply because the coat had and retains a marginal utility 
of $20. And thus the strange outcome of all this discussion 
appears to be that marginal utility, or, more accurately, 
subjective value, as value determinant presented as unre- 
lated to cost and as fundamental to cost, is itself finally 
resolved into cost. Bat however this may be, it is clear 
that, in accurate analysis, marginal utility should remain 
one thing, and the marginal cost of the marginal utility, — its 
subjective value, its worth, — should remain another and a 
quite distinct thing. On any other terms all is confusion, 
all utility becoming marginal in a general mish-mash of 
costs. For if marginal utility and cost value are one, there 
can be no utilities that are not marginal; all the similar 
items of a stock must be of equal marginal utility, equal 
subjective value, and equal market value; therewith disap- 
pears all possibility of the explanation of value by margins. 

And so when Wieser says that, "in Paradise nothing 
would have Wert but satisfactions," it is immediately to be 
added that satisfactions also would not; they would have 
utility and relative utility, but no marginal utility and no 
value, either of the subjective or of-« the objective sort, 
simply "because there one could have anything." ^° 

^ Ibid., p. 39. 

^ Friedrich von Wieser, Natural Value, edited by William Smart, 
translated by Christian A. Malloch, Macmillan, 1893, p. 20. 



324 VALUE AND DISTRIBUTION 

But the Austrian doctrine of costs will best be con- 
sidered in another connection. The task now at hand is 
to present the concept of subjective Wert with such ade- 
quacy and definiteness as the nature of the concept permits. 
To this end extended reference will be necessary to the 
Positive Theory. ^^ 

At all events, it seems from the analysis so far as at 
present carried, that even in marginal utility, strictly inter- 
preted, there is nothing- but utility, and this without any 
pretense of a measure for the utility set up, unless it be in 
the utility of some non-marginal item; and all we can then 
say is that it is the less useful of the two. 

Recalling that Say stood distinctly for the measure of 
utility by value, rather than of value by utility, one would 
like to know whether anything is made in Austrian theory 
of this distinction. According to Boehm-Bawerk, "The 
measure of the utility which depends on a good is, actually 
and everywhere, the measure of value for that good." ^^ 

And again: 

The value of a good is measured [Die Grosse des Wertes 
eines Gutes bemisst sich] by the importance of that concrete want 
or partial want which is least urgent among the wants that are met 
from the available stock of similar goods. What determines the 
value of a good [ist fiir seinen Wert massgebend] then, is not its 
greatest utility, not its average utility, but the least utility, .... 

the economic marginal utility of the good The value 

[Wert] of a good is determined by the amount of its marginal 
utility [nach der Grosse seines Grenznutzens] .^ 

Merely stopping to note that the meaning of value is 
here again referred to marginal utility as distinguished 
from the cost or displacement attendant upon marginal 
utility, we ask ourselves what is meant by saying that 
value "is determined" by the amount of the marginal utility, 

^^ Eugen v. Boehm-Bawerk, The Positive Theory of Capital, trans- 
lated, with a preface and analysis, by William Smart, Macmillan, 1891. 

^^ Ibid., p. 139. In the original the passage reads: "Das Mass des 
abhangigen Nutzens ist wirklich und iiberall auch das Mass fiir den 
Gutenwert." — "Capital und Capitalzins, zweite Abtheilung," Positive 
Theorie des Capitals, Buch III, Abschnitt III. 

^ Ibid., p. 148. 



THE MODERN MOVEMENT 325 

more than merely that vakie is marginal utility? But that 
there is a difference is to be inferred from the earlier state- 
ment that the measure of the marginal utility, the trans- 
formation of it into subjective worth, is to be traced to the 
purely psychological and subjective feeling-state attendant 
upon the existence of the want situation of the individual 
relative to the good; all of which must mean that the psy- 
chological emphasis, the significance for feeling, constitutes 
the subjective valuation, the non-relative worth appraisal 
of the marginal utility, its expression. 

So far the doctrine is parallel with that of Say, except- 
ing that, with Say, the talk was purely and solely of market 
value, and that, with subjective value, Wert, the notion is 
rather one of the expression of value than of the measuring 
of value. Subjective value, as such, implies no measure, is 
not expressed in equivalents, and stands for an absolute 
magnitude of feeling.^* 

In Boehm-Bawerk's treatment of substitutionary utili- 
ties, in the Positive Theory, he returns to the overcoat illus- 

^ It is also to be said that here, as elsewhere in Austrian discus- 
sion, there is difficulty in being certain of one's justification in inter- 
polating the word subjective or any sign that subjective worth is 
intended, — to be sure that, after all, the statement in hand is not 
intended to apply as well, or even exclusively, to market value. That 
this discussion is found in the chapter on "Subjective Value" does not 
guarantee that the thought may not drift into market-value waters. 
Thus on page 152, after discussing the subjective value of a sack of 
corn out of a farmer's stock of similar sacks, and after attaching this 
value to the marginal utility of the final sack, — clearly an absolute 
magnitude, — Boehm-Bawerk proceeds : "Transfer now the field of illus- 
tration from the solitary in the primeval forest to the bustle of a 

highly organized community The more goods there are of 

one kind in the market the smaller .... is the value The 

more individual goods there are available in any class, the smaller is 
the marginal utility which determines the value." 

That there can be no such thing as a market marginal utility, but 
only a market marginal purchase price, does not need repeating, unless, 
indeed, the assumption is tacitly made that all purchasers are precisely 
alike in point of subjective situation and of purchasing power. But 
this is merely another case of the confusion, chronic in Austrian 
discussion, of marginal utility with market value and of subjective 
value with objective value. If the Austrians cannot keep their 
categories separate, it is idle to expect others to do so. And so Hob- 
son, doing yeoman service against the straw-man doctrine that 
marginal utility determines or is market value, appears to achieve an 
easy victory over Boehm-Bawerk by merely quoting from page 159 of 
the Positive Theory : "The fewer and the less urgent the wants and 
the more goods there are to satisfy them, the deeper down the scale 



326 VALUE AND DISTRIBUTION 

tration : "I shall try to shift the incidence of the loss onto 
other lines of goods," sell some of them, or drawing upon 
my stock of cash, go without something that I had intended 
to buy, or I shall economize in household expenses, and 
only in case of extreme need go without an overcoat. 
"Only in the last case is the Wert of the overcoat deter- 
mined by the immediate marginal utility of its own class. 
In most cases it is determined by a substitutionary utility." ^* 
But again it is to be objected that this getting to the 
margin by the method of substitution is not to find the 
utility of the final item of the stock in question, or the 
utility of the single item under consideration, but only the 
cost of it, and thereby the subjective significance, the worth 
of it. And in either case, whether away from the margin 
or upon it, the worth as matter of subjective estimation 
obtains no expression in terms of something else, that is to 
say, receives no measurement, but is merely a statement of 
the absolute magnitude of significance to the individual 
well-being, and therefore is a relative quantity only in the 
sense and to the extent that it has a place higher or lower 
in the personal list of absolute feeling magnitudes. 

Wieser is as obtrusively hedonistic in his point of view 
as is Boehm-Bawerk or as were any of the classical school ; 
but the validity of his doctrine is not made to stand or fall 
thereby : 

What is it that gives value to the satisfaction itself we shall 
not attempt to explain. It will be enough if we give the symp- 

goes the satisfaction and the lower falls the marginal utility and the 
value. It comes nearly to the same thing, only in a less precise form, 
to say : Usefulness and scarcity are the ultimate determinants of the 
value of goods." 

Upon which Hobson remarks (Economics of Distribution, p. io6) : 
"Now, not only is scarcity thus fetched up from the supply side of the 
equation as a determinant of value separate from utility, but it is 
made the determinant of marginal utility itself, for 'it is the scarcity 
that decides to what point the marginal utility actually does rise in the 
concrete case' " (Positive Theory, p. i6o). And Hobson is pardonable 
for not seeing that Boehm-Bawerk is talking here about the individual 
schedule and the purely personal bearings of wants and provision for 
wants, that is, that the discussion is not in the market-value field but 
only in the subjective field. 

°' Boehm-Bawerk, op. cit., p. 156. 



THE MODERN MOVEMENT 327 

toms by which the degrees of vahie or importance are recognized. 
It is the intensity with which the satisfaction is desired;'* 

which sufficiently cuts loose from all hedonistic compHca- 
tions. 

Not free goods but only economic goods can have value ; 
and so Menger's definition is approved by Wieser : Value is 
"the importance which concrete goods, or quantities of 
goods, receive for us from the fact that we are conscious 
of being dependent on our disposal over them for the 
satisfaction of our wants." ^'^ 

But as Wieser elsewhere remarks, "Menger has a com- 
plete system of subjective value but makes no attempt to 
develop objective value." ^^ This, therefore, is not to be 
understood as a definition of market value. 

This definition, however, as adopted by Wieser, is found 
near to the beginning of his treatise, before any discussion 
of subjective value (Wert) has been attempted, and is 
formulated as a general definition of value. And so upon 
page twentj^-four, as the title of chapter ix, we read, 
"The Valuation of Goods in Stocks. The Law of Marginal 
Utility the General Law of Value." And the chapter itself 
discusses collectivist valuation, in which, evidently, there is 
no such thing possible as marginal utility in any accurate 
sense. ^^ 

^Natural Value, p. 7. ^'^ Ibid., p. 21. ^'^ Ibid., p. 54. 

^^ These confusions must, in the interests of space, be rather 
instanced than fully reported or adequately discussed. 

Confusions of utility with marginal utility ; and with price : 

"In a word, the value of a supply of similar goods is equal to the 
sum of the items multiplied by the marginal utility." 

Now while this would perhaps be true, were the question one of 
market value, it is distinctly untrue, as a question either of aggre- 
gate utility or of aggregate subjective worth, that is, the subjective 
worth of the group conceived as a whole, a unit ; but, still within the 
collectivist computation, the discussion proceeds : "A harvest consist- 
ing of 1,000,000 quarters, is short .... so ... . that grain 
dare not be consumed unless the act of consumption yield a satisfaction 
equal to the figure 10 [10 what? At any rate a social marginal utility]. 
The value of the harvest will be calculated as 1,000,000X10." 

"The various things that determine money value to the individual 
are the following : . . . . the amount of money which is at his 
disposal ; the nature and quantity of the goods which can be obtained 



328 VALUE AND DISTRIBUTION 

On page fifty-one we read: 

When we speak generally of the value of goods we mean the 
economic rank given them by their prices Some particu- 
lar designation is indispensable for the ranking of goods in economic 
exchange, and it is impossible to find any other designation than 

that of Wert The word Wert alters its original sense 

somewhat when transferred from the subjective relation to wants 
to the objective relation to price. Subjective Wert represents a dis- 
tinct feeling; that of being dependent upon the possession of a 
good for the satisfaction of a want — a distinct degree of personal 

interest in goods Objective Wert or price is not in 

the least the expression of the economic valuation of goods, even 
when it is the result of economic competition, and of the individual 
valuations of all the different members of the economic com- 
munity. Price is a social fact, but it does not denote the estimate 

under the existing market conditions and prices ; the utility [marginal] 
which these goods are able to give, as also the utility already secured 
by possessions otherwise acquired ; and, lastly, the urgency of demand" 
(p. 46). 

"In each kind of production good, taken by itself, the value of the 
product is adjusted to the level of its particular marginal utility" 
[intended as a collectivist computation, with a collectivist marginal 
utility; but what about displacement and cost here?] (p. 97). 

Confusions of marginal utility with subjective value, and with 
demand price : 

"The law of value [market value here, as the context shows] 
unites the conceptions of value and of utility in ■a. way which is 
fully confirmed by the facts : . . . . and it only remains for us now to 
combine the fact of costs with the law of marginal utility" (p. 26). 

"The law of price is nearly related to the law of value. The value 
of a stock consisting of separate items is determined as a marginal 
value, according to the marginal utility of the single good." [Seem- 
ingly a subjective-worth computation for one consumer ; in such case, 
not the whole stock, but only any one item gets valued in the way 
asserted.] "The price of a stock which is sold in separate items is also 
determined as a marginal amount, according to the purchasing power 
of the marginal buyer of the single good" (p. 43). [Here there is 
careful avoidance of making price and marginal utility equivalent ; price 
is marginal purchasing power ; but on page forty-seven it is said that, 
whether for goods or for money, "it is demand and supply, as these 
express themselves in marginal utility, that decide the exchange value."] 

"The estimate of value [here evidently subjective worth] leads 
us back to use value, and again the law of marginal utility holds" 
(p. 48). 

"The rich man, therefore, will not value his coat according to 
its utility, but according to the cost of procuring it ; in his estima- 
tion this cost will stand lower than the utility All household 

goods, which when lost or stolen, can be replaced by purchase, are 
thus valued" (p. 49). 



THE MODERN MOVEMENT 329 

put upon goods by society Relations of price and of 

objective JVert do not in the least correspond with the relative 
position of the two goods in regard to their economic importance 

or subjective valuation [But] exchange value taken by 

itself and unrelated to subjective value is unintelligible 

To explanation, subjective value is chief in importance because only 
through it can exchange value be reached. 

All this is admirable; but turning back to page thirty- 
four before there had been any talk of subjective value or 
of subjective anything, but only of value as referring to 
general market transactions, we read : 

Value is the form in which utility is calculated. .... It 
is difficult indeed to estimate the utility of a stock; easy to estimate 
its value. That is to say, the value of a stock can be expressed as 
the single product of stock and marginal utility; it is a multiple of 
the marginal utility; whereas utility can be expressed only by a 
sum which contains as numerous and as various amounts as the 
stock contains items." The utility, for instance, of a harvest of a 
million quarters can be represented only by an almost inexhaustible 

description of all the benefits accruing from it The value 

of the same harvest is easily and shortly ascertained by multiplying 
the utility of the marginal employments by the whole amount. 

But on page sixty-two better doctrine is found, doctrine 
also of the highest of importance as putting the finishing 
touches to our present discussion: 

In natural value [ideal coUectivist value] goods are estimated 
according to their marginal utility; in exchange value, according to 
a combination of marginal utility and purchasing power. 

Passing over the objection that there can be no social 
marginal utility in any other than a rough average sort, 
it is of supreme importance to note that here is an abandon- 
ment, as complete and unambiguous as that with Boehm- 
Bawerk, of marginal utility as value measure or value 
determinant. No matter how frequently Wieser has 
asserted and will assert the contrary, there is no under- 
standing of the real force and meaning of the Austrian 

*" That the value of a stock is the product of marginal utility by 
the number of items can from no point of view be true unless by 
interpreting marginal utility into marginal cost or marginal value, as 
in fact Wieser, like Boehm-Bawerk, does ; marginal utility, marginal 
cost, marginal utility value, and subjective value, all appear to analyze 
into the same thing, and exchange value also is prone to edge its 
way in. 



33© VALUE AND DISTRIBUTION 

doctrine without accepting this truth. The point of view 
does not make for marginal utility as the gist of the value 
concept or as underlying it, otherwise than as an inter- 
mediate step toward arriving at the purely explanatory and 
tributary concept of subjective worth. Exchange value, 
estimated or expressed or fixed or worked out "according 
to a combination of marginal utility and purchasing power," 
becomes not marginal utility or marginal subjective valua- 
tion, but marginal relative utility, that is, marginal sacrifice, 
marginal buyer's offer price, or marginal seller's demand 
price.^^ 

SUBJECTIVE EXCHANGE VALUE 

Subjective exchange value is defined by Boehm-Bawerk 
as "The importance which a good obtains through its 
capacity to procure other goods by way of exchange." 

In view of the non-relativity of the concept of subjec- 
tive value, there is nothing further to be urged here against 
the use of the term value for this new concept; and, in the 

*^ It may by this time be taken as established that neither in pain 
nor in utility, whether as value determinant or as value denominator, is 
there any place of abiding or hope of rest for the investigator of value. 
But even were it otherwise, were it in any way possible, cause-wise or 
denominator-wise, or both, to resolve value into a homogeneous 
medium of pain cost or of utility demand, what, after all, would it 
all profit? 

The scientific instinct for unification is undeniably strong ; to it, 
indeed, is traceable the larger part of all accomplishment in thought 
and in research. When, if ever, the ultimate atom or electron of 
matter is discovered, or, in the tentative manner of scientific generali- 
zation, is credibly assumed as a working hypothesis, the fact will be one 
of no small moment, even though everything be yet to learn as to the 
ultimate nature of this ultimate atom. So also, were it really necessary 
and at the same time credibly possible and approximately intelligible to 
accept or to suppose a social pain unit or a social pleasure item, or 
did it in any sort advance the case to compute some average level 
of pain experience or of pleasure experience and to conceive of this 
average level as homogeneous in a degree to permit of some typical 
or normal or standard or average unit-resultant, and were there no 
other method of making intelligible and manageable the phenomena 
with which economic science has to deal, and were the new fields of 
research thus thrown open for entry as attractive as the old fields 
made necessary of abandonment, — the pain-jelly or the pleasure-jelly 
hypothesis — it not at all mattering which — would impose itself upon 
our acceptance. 

But it is first to be noted that the entire marginal analysis, for 
whatever it has accomplished and for whatever it promises, would 
be first among the things to be abandoned ; and this would involve not 



THE MODERN MOVEMENT 331 

German, Wert may be the only resource for the case, if 
there is occasion or justification of any sort for the new 
concept. The use of the new term seems to have been 
responsible for the adoption of objective exchange value; 
there being, by assumption or enactment, a subjective 
exchange value, the interests of symmetry now impose a 
longer and more cumbersome term in place of market 
value, but with no added significance, other than that of 
contrast with subjective exchange value. 

But the fact appears to be that "subjective exchange 
value" is absolutely without serviceability in the value 
investigation; it is a case of purely gratuitous distinction- 
drawing and term-making, and this in face of Boehm- 
Bawerk's oft-quoted confession that he "would 
gladly exchange these pedantic and clumsy expres- 
sions, etc. ; . . . . but .... use value and exchange 
value are not suitable at all, because, as we shall see, there 
is a subjective exchange value." *^ 

merely the loss of those contributions distinctly to be credited to the 
modern movement, but also the entire Ricardian land-rent doctrine, 
and together with this the complete scheme of marginal cost in its 
relation to value. 

But, finally, what is it that this labor-jelly or pain-jelly or utility- 
jelly hypothesis can offer us? In no sense a homogeneous medium into 
which all costs or all services may be resolved, but a homogeneity 
supposedly actual and valid only for the marginal cases. The truth is, 
then, that nowhere are the glittering promises in the way of being 
kept ; the thing that is tendered is not the thing held out as in prospect. 
Nor is there offered any substitute for the thing promised, but rather a 
relinquishment of it ; for of what service would be this mere fringe of 
homogeneity at the lower edge of the wide value tract? How does 
any alleged general value determination by the marginal-cost item come 
to recommend itself to be a resolution of all the non-marginal cases 
into an equality in pain origin or in service offering? In its very 
terms, this solution turns out upon examination to be a no-solution. 

But if it is indeed true, — and it is no part of the present purpose to 
deny it, — that for the various and different market demands to come 
jointly to bear upon market value, they must find a way to get them- 
selves aggregated ; and if it is true that costs as bearing upon value 
must likewise become comparable and, for the purpose, homogeneous ; 
and if men imperatively need in their commercial affairs some 
generalized form of value expression, a language, a standard, a denomi- 
nator, it is fairly to be urged that in the system of price-offer, price- 
refusal terms, a money-price rendering of value, and a money standard 
of deferred payments, the precise thing required is offered and is 
attained. More cannot be had, and were more to be had, there would 
be no need for it, 

*^ Positive Theory, p. 130, note. 



332 VALUE AND DISTRIBUTION 

But the adoption of the new term is more than merely- 
gratuitous ; it is bad in logic ; it involves the absurdity of 
asserting that the utility of the cow that you sell is, after all, 
not the utilit}'' of the cow, but the utility of the horse which 
you receive in return. And doubtless this is true in a sense, 
though it seems to leave the cow strangely bereft of any 
utility whatever, unless perhaps that previously contentedly 
possessed by her, but now repudiated and cast off, or, 
possibly, appropriated by the horse. This recalls the pro- 
cedure by which the utility of the overcoat was suddenly 
reduced from 20 to 10 by the mere fact that it could be had 
for 10. 

The truth appears to be that the notion of quasi-rents, 
buyer's or other, is sufficient for all cases presenting this 
aspect of the differential principle. And the concept indi- 
cated by the term is really needed to explain the demand 
for goods, the forward-looking attitude toward exchange, 
and the degree and kind of the purchase-elasticity. 

Let it, for example, be taken as true that, having no coat, 
one would, if necessary, pay twenty dollars for a coat, but 
needs pay only ten ; or that, having a coat of a twenty- 
unit power of service, one could, if he lost it, replace it at 
ten. Doubtless one may say that the subjective worth is 
10, but this 10 is obviously not well adapted to" serve as an 
expression of the bidding disposition; 20 is still the maxi- 
mum bid; to place the utility at 10 leaves it strangely stand- 
ing as true that one is willing, if necessary, to bid the price 
up to twice the utility. 

But this is not the worst of the bad logic. Subjective 
exchange worth, like marginal utility and subjective worth, 
must justify its existence in economic terminology through 
its service as tributary to the explanation of market value, — 
as a term, standing for some intermediate analysis subsid- 
iary to the elucidation of the problem under investigation. 
On any other basis each of these terms is an impertinence. 

But unfortunately for subjective exchange value, it is 
an ex post facto concept, a term derivative from the 
exchange transaction, and expressing the advantages 
derived from it; as such, it loses all importance as helping 
in the explanation of the terms of the exchange. It substi- 
tutes the backward-looking view for the forward and 
recalls little Alice of the looking-glass experience, who 
used to cry before she had cut her finger, and having cut 



THE MODERN MOVEMENT 333 

it, laughed, the pain being over ; and who occasionally lost 
much time rapping upon the door to get in when she was in 
already. 

Both Wieser and Boehm-Bawerk stand for the subjec- 
tive-worth concept. And Wieser applies here something like 
the foregoing logical methods in his attempt to demonstrate 
not merely that subjective worth is a necessary concept in 
the elucidation of market value — as in fact it is — but that 
it is adequate thereto — as in fact it is not. Without this 
absolute-magnitude kind of value for each of the two 
things to be compared, there could, he rightly argues, be 
nothing to compare. Each must be worth-estimated 
separately, and then a comparison of them made, before, 
as a result, a readiness for exchange may be reached. The 
exchange advantage expresses itself as the greater absolute 
magnitude of the so-called objective exchange value 
over the direct — the subjective — value. True, the compari- 
son is ordinarily made through money; but accurately the 
subjective exchange value of my cow is not in the money, 
but in that which I shall purchase with the money, e. g., 
a horse, regarded in its aspect of direct subjective value, 
as an absolute satisfaction magnitude. 

And so, by finding two subjective values, by comparing 
them, and then attributing the second value to the first, 
thereby returning to a non-relative fact; having, that is, 
once used the relationship and then dropped it, or lost it 
by absorption, Wieser concludes that he has all the while 
been within the field of absolute magnitudes.*^ 

^Natural Value, pp. 50, 53, note. 



CHAPTER XVIII 

CLASSICAL VERSUS MODERN (DIETZEL VS. BOEHM- 
BAWERK) 

It is commonly stated that in the early seventies three 
different investigators, Menger, Jevons, and Walras, work- 
ing independently and in different languages, arrived at 
practically identical positions in their reformulation of 
economic doctrines. That there was practical identity in 
point of view — in the emphasis on demand as against sup- 
ply, and upon utility as fundamental to cost — and that the 
marginal method in the analysis of market adjustments 
was common to all three, must be admitted; and this is a 
degree of similarity sufffciently remarkable. 

But the divergencies were important enough to influ- 
ence greatly the subsequent development of the derived 
lines of thought. Jevons made only slight attempt at analy- 
sis of the phenomena of individual valuation, and, whether 
for better or for worse^ is only in the slightest degree respon- 
sible for the beginning and the growth of the doctrine of 
subjective worth. For the most part, Jevons' work was in 
the field of market value, and especially of the distributive 
categories derivative from the value concept. Menger 's 
work is, on the other hand, mainly restricted to the field of 
subjective valuation and subjective value — worth in the 
individual schedule.^ 

Vevons and Walras are on the whole much alike both in point 
of view and in method of treatment ; for the purposes in hand their 
positions are, indeed, practically identical ; that is to say, neither does 
anything of appreciable significance distinctly within the field either 
of subjective worth or of subjective valuation in the accurate, the 
relative, sense. Both directed attention especially to the marginal 
analysis, and, without attempt to examine into the precise nature of 
the margin, employed the principle of the satiability of desire as 
explanation of the principle of marginal utility in the demand curve. 
As against himself, Walras accords priority in time to both Gossen and 
Jevons, so far as refers to the leading principles of the method and to 
the point of view, but regards himself as having made some fields of 

334 



CLASSICAL VERSUS MODERN 335 

The later doctrine has been developed mostly along the 
lines of Menger's analysis, and chiefly by his convinced 

the development and the application of the theory peculiarly his own: 
"This half-volume was, indeed, prepared and almost entirely printed, 
and I had communicated the main points of the theory herein expounded 
to the Academy of Moral and Political Sciences at Paris, when, a 
month since, I made the acquaintance of a treatise upon the same 
subject, entitled The Principles of Political Economy, published in 

1873 .... by Mr, W. Stanley Jevons Like myself, this 

author applies the mathematical analysis to pure economics, and 
especially to the theory of exchange ; and — a truly remarkable fact — 
bases the entire reasoning upon a fundamental formula, which he 
terms the equation of exchange, which is rigorously identical with that 
which has served me as point of departure, and which I call the 
condition of maximum satisfaction. Mr. Jevons has especially directed 
his attention to the general and philosophical exposition of the new 
method and to laying the foundations of its application to the theory 
of exchange and to the theories of labor, of rent, and of capital. As 
for myself, I have made especial effort to make thorough exposition of 
the mathematical theory of exchange. This leaves me in duty bound 
to ascribe the priority of formulation to Mr. Jevons, the while reserving 

to myself some claim to several important deductions In my 

opinion, Mr. Jevons' work and my work, so far from antagonizing each 
other, confirm and complete and essentially strengthen each other." — 
Leon Walras, Preface to Elements d' Economic Politique Pure, 4th 
ed., 1900. 

There is, then, from the point of view of the present investigation, 
no especial call for detailed report or criticism of either Jevons or 
Walras. Their mathematical forms of statement and method of 
investigation, if there really be a separate method, serve to make the 
task one as impracticable for the present writer as it would probably 
turn out to be unserviceful to the reader. 

Walras' rendering of the marginal-utility doctrine makes a dis- 
tinction between extensive utility and intensive utility ; a commodity has 
extensive utility up to the point where no more of it will be consumed 
even upon terms of being offered gratis ; intensive utility is the sort of 
utility that influences the demand curve {ibid., p. 73). "We call the 
utility intensive because of the fact that the commodity responds to 
needs more or less intense and pressing, accordingly as, with a 
greater or smaller number of men, these needs persist, despite the 
height of the price, and persist more or less strongly with different 
men ; because, that is to say, the importance of the sacrifice to be made 
to procure the commodity has more or less influence upon the quantity 
of the commodity consumed" {ibid,, p. 73). 

All of which amounts to reducing the different demands of 
different individuals to a homogeneity of utility ; thence comes the 
interpretation of the demand-price curve as a mere intensity-of-utility 
curve. 

Based upon this line of reasoning, the further development of the 



336 



VALUE AND DISTRIBUTION 



pupils or disciples. Therefore, in the interests both of 
effectiveness of exposition and of economy of space, it has 

marginal-utility analysis is easily foretold ; market value and marginal 
utility become coincident quantities. 

But it is still to be noted that all of this analysis proceeds upon 
the assumption of existing and temporarily fixed supplies of goods, 
that is of goods unaffected, for the time being, by influences of cost. 
This was also the method of Jevons, the further problem being to 
analyze and formulate the cost influences in their relation to supply. 
Walras, as it seems to this writer, gets not much farther toward the 
solution of the problem than a more or less inadequate formulation of 
it : "In a word, it remains to decide whether it is the price of 
tlie productive services that determines the price of the product, or rather 
the price of the product, determined as we have seen through the law 
of demand and supply, that determines the price of the productive 
services, by virtue of the law of cost of production, the prix de revient" 
(ibid., p. 176). 

As for Jevons, it is further to be said that in numerous cases he 
impliedly or explicitly adopts the notion of a social utility ; that he 
repeatedly makes the feeling-quantities of different men both comparable 
and commensurable ; and that he repeatedly identifies marginal utility 
with marginal offer price ; and that his general reasoning involves of 
necessity each and all of these assumptions. It is nevertheless true 
that, in more careful analyses and formulations, each of these positions 
is repudiated and the correct doctrine accorded adequate recognition. 
A few questions must suffice under these heads : 

SOCIAL UTILITY, COGNATE TO THE SOCIETY-AS-AN-ORGANISM DOCTRINE 

"In a time of scarcity the utility of barley as food might rise so 
high as to exceed altogether its utility, even as regards the smallest 
quantity, in producing alcoholic liquors. In a besieged town the employ- 
ment of articles becomes revolutionized." — Theory of Political 
Economy, 3d ed., London, 1888, p. 61. 

"We are now in position to appreciate perfectly the difference 
between the total utility of any commodity and the degree of utility of 
the commodity at any point" (ibid., p. 49). 

"The laws which we have to trace out are to be conceived as 
theoretically true of the individual ; they can only be practically 
verified as regards the aggregate transactions, productions, 
and consumptions of a large body of people. But the laws 
of the aggregate depend of course upon the laws applying in individual 
cases" libid., p. 48). 



THE FEELINGS OF DIFFERENT MEN MADE C0MMENSUR.\TE AND 
HOMOGENEOUS 

"In Paris [in the siege of '70] a vast stock of horses were eaten. 
Hot so much because they were useless in other ways, as because they 
were needed more strongly as food. A certain stock of horses had, 
indeed, to be retained as a necessary aid to locomotion, so that the 
equation in the degrees of utility never wholly failed" {ibid., p. 61). 

"Suppose that the rate of exchange is approximately that of ten 



CLASSICAL VERSUS MODERN 337 

again seemed desirable not only to violate the time sequence 
in the development of doctrine, but to accord scant recogni- 

pounds of corn for one pound of beef ; then if, to the trading body 
which possesses corn, ten pounds of corn are less useful than one of 
beef, that body will desire to carry the exchange farther. Should the 
other body possessing beef find one pound less useful than ten pounds 
of corn, this body will also be desirous to continue the exchange. 
Exchange will thus go on until .... loss of utility would result if 

more were exchanged The degrees of utility have come to 

their level, as it were" (ibid., p. 96). 

" .... In other words, if increments of commodity be 
exchanged at the established ratio, their utilities will be equal for 
both parties" (ibid., p. 96). 

But, "No attempt is made to compare the amount of feeling in 
one mind with that in another. I see no means by which such a 
comparison can be accomplished. The susceptibility of one mind may, 
for what we know, be a thousand times greater than that of another. 
But, provided the susceptibility was greater in like ratio in all direc- 
tions, we should never be able to discover the difference 

Between A and B there is a gulf fixed. Hence the weighing of motives 
must always be confined to the bosom of the individual" (ibid., p. 14). 

"The general forms of the laws of economics are the same in the 
case of individuals and of nations ; and, in reality, it is a law operat- 
ing in the case of multitudes of individuals which gives rise to the 
aggregate represented in the transactions of a nation. . . . „ The use 
of an average, or, what is the same, an aggregate result, depends upon 
the high probability that accidental and disturbing causes will operate 
in the long run .... so as to neutralize each other" (ibid., 
pp. 15, 16). 

MARGINAL UTILITY IDENTICAL WITH MARKET PRICE 

"We shall seldom need to consider the degree of utility except as 

regards the last increment I shall therefore commonly use 

the expression iinal degree of utility, as meaning the degree of utility 
of the last addition, or the next possible addition of a very small, or 

infinitely small, quantity to the existing stock We may know 

the degree of utility at any point while ignorant of the total utility" 
(ibid., p. 51). 

"The value of a divisible commodity is measured not, indeed, by 
its total utility, but by its final degree of utility" (ibid., p. 137). 

"Value depends solely upon the final degree of utility. How can we 
vary this degree of utility, etc.?" (ibid., p. 164). 

But on page 141 : "The general result of exchange is thus to 
produce a certain equality of utility between diflferent commodities, as 
regards the same individual ; but between different individuals no such 

equality will tend to be produced The degree of utility of 

wealth to a very rich man, etc." 

Marshall's well-known note (Principles, Book V, chap, xiv) admir- 
ably discusses Jevons' remark (Theory, p. i) : "Repeated reflection 
and inquiry have led me to the somewhat novel opinion that value 
depends entirely upon utility" — saying — "A trading body is not a person ; 



338 VALUE AND DISTRIBUTION 

tion to personal questions of priority or of originality in the 
progress of this doctrinal evolution. That the works of 
Wieser and Boehm-Bawerk stand today as the most au- 
thoritative expression of what is characteristic and domi- 
nant in the unfolding of Austrian theory must serve as 

it gives up things that represent equal purchasing power to all of its 
members, but very different utilities. It is true that Jevons was him- 
self aware of all this Jevons' antagonism to Ricardo and Mill 

would have been less if he had not himself fallen into the habit of 
speaking of relations which really exist between demand price and 
value as though they held between utility and value." 

Jevons' account of the relation of cost to value needs some slight 
attention at this point. Does cost fix value or value cost? 

"Wages are governed by the same formal laws as rents 

So far as cost of production regulates the values of commodities, wages 
must enter into the calculation on exactly the same footing as rent." — 
Op. cit., Preface, p. xvi. 

"When labor is turned from one employment to another, the 
wages it would otherwise have yielded must be debited to the expenses 
of the new product. Thus the parallelism between the theories of rent 

and interest is seen to be perfect in theory Precisely the same 

view may be applied, mutatis mutandis, to the rent yielded by fixed 
capital, and to the interest of free capital" {ibid., p. xlix). 

"Value depends solely on the final degree of utility. How can we 
vary this degree of utility? .... By having more or less of the 
commodity to consume. And how shall we get more or less of 
it? . . . .By spending more or less labor in obtaining a 

supply I hold labor to be essentially variable, so that its 

value must be determined by the value of the produce, not the value 
of the produce by the value of the labor" {ibid., pp. 164, 165). 

Then, having treated the production margin as an equilibrium 
between the labor pain of production and the pleasures attaching to 
the possession or consumption of the product, — "labor will be carried on 
till the increment of utility .... just balances the increment of 
pain," he continues : "The preceding theories lead directly to the 
well-known law, as stated in the ordinary language of economists, that 
value is proportioned to the cost of production As the incre- 
ment of labor considered is always the final one .... articles will 
exchange in quantities inversely as the costs of production of the most 
costly portions, i. e., the last portions added" {ibid., p. 186) : Which 
sums up in accepting all of what is most pernicious in the labor-cost 
doctrine, viz., the abandonment of entrepreneur cost, the adoption of 
pain cost, and the jellification of labor. It may be here noted that 
Pantaleoni concurs in this labor-pain-cost view (Maffeo Pantaleoni, 
Pure Economics, Macmillan, 1898, p. 102), as, for that matter, in most 
other of Jevons' errors, e. g., in his constant and consistent hedon- 
ism, and in the repeated identification of marginal utility with marginal 
demand and with market value. 



CLASSICAL VERSUS MODERN 339 

justification for the prominence — near to exclusiveness — 
given to these two writers in these pages. 

Wieser had in 1884 pubHshed his Ur sprung und Haupt- 
gesetze des tvirtschaftlichen Wertes, and had been by Hein- 
rich Dietzel somewhat scathingly reviewed. In 1885 
appeared Boehm-Bawerk's Capital und Capitahins, and in 
1886 the Grundsuge dcr Theorie des wirtschaftlichen Gu- 
terwerts. In 1890, and before the pubHcation of the Posi- 
tive Theorie, was pubHshed Dietzel's onslaught upon the 
newer doctrine, Die klassische Werttheorie und die Theorie 
vom Grenznutzen. During the same year came Dr. Robert 
Zuckerkandl's few pages of reply, and a short note from 
Boehm-Bawerk formulating certain questions which, with 
their answers by Dietzel, were intended to make precise 
the issues to be debated. Dietzel promptly replied to the 
questions as formulated, and in 1892 appeared the rejoinder 
of Boehm-Bawerk. - 

The entire controversy, and especially that portion of it 
belonging to Dietzel and Boehm-Bawerk, is to our purpose 
as serving in peculiarly marked degree toward bringing 
into intelligible statement the issues between the two points 
of view. 

Dietzel's review of Wieser need not detain us here. 
The later and more formal article, Dietzel's attack upon 

^ 1884, Wieser, Ursprung und Hauptgesetze des wirtschaftlichen 
Wertes. 

1885, Dietzel, review of Wieser's Ursprung und Hauptgesetze, 
Conrads Jahrbiicher, neue Folge, XI, 161. 

1885, Boehm-Bawerk, Capital und Capitalsins. 

1886, Boehm-Bawerk, Grundznge. 

1890, Dietzel, Die klassische Werttheorie und die Theorie vom 
Grenznutzen, Conrads Jahrbiicher, N. F., XX, 563. 

1890, Zuckerkandl, Reply, Die klassische Werttheorie und die 
Theorie vom Grenznutzen^ ibid., XXI, 509. 

1890, Boehm-Bawerk, Ein Zwischenwort zur Werttheorie, ibid., 
XXI, 519. 

1 89 1, Dietzel, Zur klassischen Wert- und Preistheorie, Conrads 
Jahrbiicher, dritte Folge, I, 685. 

1892, Boehm-Bawerk, Wert, Kosten und Grenznutzen, ibid.. Ill, 
321. 



34° VALUE AND DISTRIBUTION 

the general position of the newer school, opens with the 
pardonable error of assuming that Boehm-Bawerk's doc- 
trine of subjective value is offered as somehow a workable 
doctrine of market value. Dietzel, therefore, directs his 
attack against the Austrians' peculiar ground of Crusoe 
conditions and of purely personal analysis, and asks 
whether, upon these terms, value, as a relation between 
commodities, is a question of marginal utility rather than 
of marginal cost. 

And Dietzel makes it fairly clear that, in the Crusoe 
economy, the only possible common denominator under 
which freely reproducible goods can obtain an objective 
and practicable basis of comparison must be the labor-cost 
denominator. True, utility, may, for goods limited in 
supply, stand as the best thing, because the only thing, 
possible; but when the good can be reproduced by labor, 
labor will come to stand as the cost; the loss of the good 
will appeal to Crusoe only as the loss of the labor of 
replacement, and the good, no matter how much greater its 
utility may be, will fall to the value rank set by its cost. 
And Dietzel points out that, especially with goods not exist- 
ing in stocks, their utility affords no basis of comparison ; 
all goes over to cost computations : "Assume that the cabin 
can be reproduced in lo hours, the net in lo, the bow in 8, 
the food supply in 5 ; Crusoe, if he knows anything about 
how to figure in economic fashion, will fix the Wert of the 
goods at the figures 10, 10, 8, 5." Suppose Crusoe to need 
per day three liters of water and ten fish, and has in store 
three days' provision of each, nine liters of water, and 
thirty fish. Will he appraise the water and the fish, rela- 
tively, according to their respective marginal utilities? If 
with five hours of labor he can get nine liters of water or 
ten fish, he will be indifferent whether he lose his three 
days' supply of water or his one day's supply of fish. 

But from all this — and there is more of it, and of a 
most convincing sort — it is evident that there is no issue. 



CLASSICAL VERSUS MODERN 341 

In the Grundsuge, Boehm-Bawerk had admitted the prin- 
ciple of cost — of substitution — and had even gone so far as 
to say that the utility of the purchased good actually was 
the utility — the subjective worth — of its cost good; and 
where, — as is admitted is sometimes the case, though the 
rarity of it appears to be overstated, — the method of replace- 
ment is labor pain, labor pain was admitted to be the cost. 

But note carefully that with Boehm-Bawerk this labor 
pain as cost leads only to the establishment of subjective 
worth; with Dietzel labor pain becomes a relational, com- 
mon-denominator, medium fact. What, for example, does 
this 10, 10, 8, 5 series of figures mean to Dietzel? Simply 
relations of importance, reflecting the relative labor require- 
ment ; nothing is implied by Dietzel, and nothing is cared 
whether the services from possession or the pains from 
procurement be little or much ; he is in pursuit of a com- 
mon denominator and a basis and a cause for precise com- 
parison. But with Boehm-Bawerk a subjective value of 10 
means a certain quantum of feeling, so much pleasure, or 
defense from so much pain, a definite f eeling- volume ; and 
if the subjective value (worth) of this 10 of pleasure is; 
by virtue of its cost, only five, this 5 likewise is a non-rela- 
tional fact, a definite quantum of pleasure lost or of pain 
accepted in order to obtain or to retain the 10 item of well- 
being magnitude. 

And therefore the simple fact is that there is no issue. 
Dietzel is talking of the relations between Crusoe's utilities, 
his wz^^r-valuations — to accept for the moment the Aus- 
trian view of the terms, while Boehm-Bawerk is within the 
field of absolute magnitude. Dietzel is in the field of 
exchange value ; Boehm-Bawerk's discussion is sub- 
jective-worth discussion. 

Dietzel's attack being mostly beside the point, as rais- 
ing no issue, the reply contributed by Dr. Robert Zucker- 
kandl, at that time Privat-Dozent in the University of 
Vienna, could have no great significance in the discussion. 
The following passage, however, deserves record: 

It is an error to suppose that the later value school has seriously 
in mind the basing of market valuation upon the analysis of the 
economics of isolation. This method has been used only for 
readier illustration and in order to make certain phenomena in 
actual economic life more fully intelligible. Beyond this the 



342 VALUE AND DISTRIBUTION 

isolated economics is without interest Actual economic life 

is something essentially different from an isolated system, and what 
serves in the one as a rule may very readily in the other be only an 
exception. And so, if the labor measure were taken to hold for the 
Crusoe case, little would follow from this for actual affairs. 

Seemingly in entire ignorance of Zuckerkandl's con- 
tribution, Boehm-Bawerk now attempts to bring the con- 
troversy to precise issues, and thereupon transfers the 
whole discussion forthwith to the market-value field. 

Does Dietzel regard the "sum of labor" in production 
as synonymous with cost of production, or does he mean 
by "cost" the sum of the various different costs of the 
entrepreneur, in which the labor itself figures not accurately 
as total but only as one value item? (That is, does Dietzel 
accept entrepreneur cost as the significant cost category?) 

Answer: The latter, the entrepreneur view, is accepted. 

Does Dietzel regard the value of the cost good as the 
cause of the value of the product, or is the product value 
the cause, and the cost-good value the effect? 

Answer : Each is the cause of the other. 

Is the issue merely that the later school arrive at market 
price out of the worth estimates of the marginal traders, 
and only round-about-wise out of cost, while the classical 
school go directly to the cost fixation? 

The answer is not quite specific, but the issue is stated 
to be upon the interpretation and treatment of costs. 

Does Dietzel regard labor as a valuable good falling 
under the cost-of -production law, and as fixed in value by 
the subsistence cost of self -maintenance and of rearing 
successors ? 

Answer: Yes, in the long adjustment. 

Dietzel prefaces these answers with the complaint that 
while he had taken the Austrians upon their own peculiar 
ground, the psychological analysis of the individual eco- 
nomic life, the reply is merely to transfer the discussion 
to the field of competitive trading; in all of which com- 
plaint Dietzel is correct enough, but for the fact that the 



CLASSICAL VERSUS MODERN 343 

isolated analysis is not conceived by the Austrians, at their 
best, as basis for the solution of the market-value problem, 
but merely as preparation for the problem. 

In fact, labor cost, as the solution of the supply side of 
the value equation, can hardly be attacked in the Crusoe 
system of things, or in any system where all men are con- 
ceived to be precisely alike. Not so, however, for actual 
market conditions; all the products of one producer may, 
both in cost and in marginal utility, be the equivalent, in 
subjective worth, of the day's-end item of labor applied, 
and may exchange against similarly produced and meas- 
ured goods of another producer. The goods purchased by 
either man will then be obtained through this marginal, 
day's-end, labor burden; that is, labor cost will apply for 
each man to limit his volume of product and to express the 
importance of the purchases made through his product; 
but the goods produced find, for their utility or subjective 
worth, no measure or expression in the ratios at which one 
man's products exchange against the other man's 
products ; the quantities of time respectively devoted by 
the two men, the burdens undergone, the pleasures 
obtained, will have in the market-value expression no 
relation to each other. 

Dietzel accepts the entrepreneur notion of cost, that is, 
he makes cost items enter into the computation only as 
reduced to terms of value. Thus far, then, there is for 
present purposes still no issue; though, as we shall later 
see, the Austrians do not themselves hold consistently to 
the entrepreneur analysis. 

But upon the question whether market value is the 
cause or is the effect of cost, the discussion moves toward 
more definite positions of disagreement. Dietzel does not 
deny that cost goods derive, in a sense, their values from 
the values of their products : 

I declare plainly that .... both time and labor powers 
derive their character as goods from their usefulness, only not an 
actual but a potential usefulness, in the sense that they are the 
conditions of all satisfaction of wants and of all creation of 
utility; further, that they derive their character of economic goods 
[that is, valuable goods] from the fact that they are limited in 
supply. 



344 VALUE AND DISTRIBUTION 

Note now that Dietzel is attempting to make labor a 
valuable good in precise parallel with machinery or land, 
and this not in the sense merely that effort must be com- 
pensated in order to obtain product, and compensated 
approximately in the measure that it is attended by value 
product, but in the sense also that labor has an objective 
existence, as a thing separate from the putting-forth of it, 
seemingly as a not-man fact, like land or appliances. 

But Boehm-Bawerk had put his question in the alterna- 
tive, implying that the production good must be the cause, 
with the value of the product the result, or vice versa. 
This Dietzel denies : "The value of the production good 
and the value of the consumption good condition each 
other mutually," since no production good has value if its 
product is valueless, and no product has value if its 
production good is valueless. 

A mine derives its character as a good from the fact that it 
can produce useful products ; it becomes a valuable good from the 
fact of its scarcity. [Or is it from the scarcity of its products?] 
The product of the mine derives its value from the value of the 
mine, the mine its value from the value of the product. The 
Johannisberger vineyard is a good because of its potential [?] 
importance as the condition of the satisfaction of the desire for a 
particular wine; the vineyard is a valuable production good be- 
cause it is a unique, or an absolutely scarce, production good. The 
wine gets its value from the value of the vineyard. If the vineyard 
loses its value, as, for example, by new methods of viticulture, the 
wine would, so far as its value were a land-cost value, become value- 
less. The vineyard, in turn, gets its value from the value of the wine. 

Dietzel's objection to the alternative form of the ques- 
tion would, however, better have run not so much that 
either answer is correct as that neither is correct. For 
certain purposes and for its particular point of view either 
way of answering must indeed be admitted to be correct; 
but the difificulty is that the alternative question assumes 
that upon the one side or the other the ultimate causes are 
to be found. It is surely true that an existing market value 
is the cause of the entrepreneur consenting to make his 
cost outlays ; and it is equally true that forthwith the entre- 
preneur product affects, modifies, and readjusts the market 



CLASSICAL VERSUS MODERN 345 

value of the product; and it is also true that meanwhile 
entrepreneur competition is placing new values on the 
cost goods and bringing about a new proportion-adjust- 
ment of values with costs, or of costs with values ; and, 
in turn, upon these new costs are based new entrepreneur 
opportunities, computations, and producings, and so on 
indefinitely in a circle, the result of each situation becoming 
in its turn a cause for the next term in the series. The 
ultimate causation must, then, be sought elsewhere; in the 
sense of finality neither cost nor value is cause, and any 
attempt to fix upon either as ultimate, or even as logically 
prior to the other, must inevitably lead to circuity of 
reasoning or to question-begging. 

As between cost and demand, Dietzel admits and agrees 
that the earlier fact in the sequence is the demand with its 
possible price; mines could not be scarce if people did not 
want iron; but then comes in cost to put the later, but the 
decisive, touches to the situation. True it is that what the 
buyers will, at the outside, pay limits what the producers 
may spend in costs ; in this sense the demand determines 
the cost ; but the last determination and the exact one is the 
cost. The demand gives the maximum possible price; the 
cost gives the actual price. 

On the question whether labor as a productive fact 
derives its value from cost of production, Dietzel says that, 
as a short-time doctrine, the value of the labor is explained 
by the fact that satisfactions depend upon it. But in the 
long run wages cannot be lower than the expenses of 
living and of rearing a family; and if higher than this, the 
increase in numbers will finally prescribe the subsistence 
level of wage. Precisely how this works itself out he 
leaves to be taken for granted. 

Boehm-Bawerk in rejoinder, two years later, says, with 
all emphasis, that the issue is not at all upon the validity 
of the law of costs: 

The actual and essential features of the cost law, viz., that cost 
regulates the value of reproducible goods, that we commonly 
appraise the goods directly according to costs, that changes on the 



346 VALUE AND DISTRIBUTION 

side of cost cause changes in the level of value, these things the 
marginal utility theorists have never in the slightest overlooked or 
denied. 

The issue, he says, is merely as to whether this cost 
law is final or whether, on the other hand, it rather does 
not itself need explanation. And to add the necessary 
explanation involves an extension of theory, yet not an 
extension of a sort to cut across the cost law, or to mutilate 
it, but one which shall support and strengthen it. 

This then is the issue for which we have been waiting. 
Excepting in the entirely unworkable sense of labor 
pain, the classical school did not, and, as has already 
sufficiently appeared, do not explain costs. And it is also 
sufficiently evident that costs require explanation. It is at 
all events to be set down to the credit of the later school 
that this problem is fully faced by them, and a serious and 
systematic attempt made toward its solution. That there 
are serious and obvious doctrinal gaps in the Austrian 
analysis of demand, that the terminology, while more than 
prodigal, is yet both illogical and insufficient, are defects 
not intrinsically overserious of remedy. And in these 
particular aspects, the newer position, with the necessary 
modifications, would not be fundamentally at variance with 
the Ricardian doctrine and point of view. The ultimate 
test must come with the newer treatment of costs. In the 
conviction of the present writer, the Austrian doctrine, as 
tried by this test, makes not better than a passable showing. 

Boehm-Bawerk continues : Doubtless value as cost may be 
used to explain value as product; but how explain the first 
value? If value is traced back far enough, it is almost certain 
to come upon some non-reproducible good, for the value 
of which cost will not serve as explanation, or at all events 
to come upon labor. How value this non-reproducible 
good or this labor? Shall we, with Dietzel, value the labor 
by its production costs, by the bread and meat necessary to 
maintain tlie laborer and his family? But these have them- 
selves already been value-explained in terms of labor. 

The later school resorts for the solution of this diffi- 
culty to the doctrine of production-related cost goods, the 
doctrine, namely, that the value of a production good in 



CLASSICAL VERSUS MODERN 347 

any particular employment is derived from its value in 
other employments, so that the values of similar goods are 
equal as determined by their values in their marginal use — 
a solution of the cost problem in terms ultimately of 
utility rather than of pain : 

And as the value [subjective worth] of each similar sack of 
corn is determined according to the utility of the sack dispensed 
with at least sacrifice, so the value [Wert — subjective? objective?] 
of all production goods is determined generally according to the 
value of the most easily sacrificed good which will be produced out 
of the common production store, or, as we call it, according to the 
marginal utility of the marginal product. 

And here, it is to be remarked, are summed up all the 
faults and errors in the Austrian solution ; for it must be 
that we are talking of market value, since it is Boehm- 
Bawerk himself who has elected to transfer the discussion 
out of the subjective field: (i) With cost as a competitive 
problem — an entrepreneur reckoning — the value of the pro- 
duction good in one use is not necessarily dependent upon 
its having an alternative industrial employment. As long 
as there is an alternative bidder for it, competition by other 
entrepreneurs, it does not at all matter whether the good 
has several valuable applications or only one. 

Boehm-Bawerk's reasoning mixes collective with com- 
petitive cost computations, a radical and all-pervasive error. 
But how as a Crusoe or a collectivist problem? Even so, 
the utility, the importance, the subjective value of an agent 
does not depend on its having another use ; only the cost 
aspect of the agent, as a constituent of the production cost 
of the product, so depends ; it is, in such case, the worth of 
the one and sole product that gives worth to the agent; 
agent-wise, there is no question of cost. 

(2) It is most difficult to make out what Wert stands 
for in Boehm-Bawerk's formulation. In the first use, it is 
almost of necessity the subjective-value concept that is 
intended. The second use cannot bear the subjective-value 
meaning, else, as non-relative, it would be meaningless, 
or would be worse, as introducing all of the rich-man- 
poor-man perplexities. It has more the sound of some 
social marginal utility, society being conceived of as, for 
the purpose, an individual. But this concept any Austrian 



348 VALUE AND DISTRIBUTION 

would be quick to outlaw as nonsense. Nor logically and 
justifiably can the concept be one of marginal market 
value, or any other market-value concept, since it is market 
value that is sought to be explained. But whether logical 
or not, this last is probably the correct interpretation; it 
seems, indeed, to be the only possible interpretation. And 
so, assuming that there is an alternative and marginal use, 
and that this use has a value of its own, independently of 
the other and non-miarginal uses, the Austrian method will 
trace the value of the other productive items back to the 
value of this marginal use. But it will still remain to 
explain the value of this marginal use, and to establish for 
value purposes its independence of the non-marginal items 
or non-marginal uses. Must not this marginal-value use 
be also explained by appeal to some displacement, some 
cost ? 

But whether this newer view is or is not tenable, Dietzel, 
as Boehm-Bawerk rightly points out, has himself adopted 
it. Dietzel recognizes that the value of the cost good must 
be explained; and when he says, "The cabin that saves me 
ten hours' labor is of equal worth to me with the products 
which I need and which with this sum of labor I purchase 
from nature, he may be able to see how his explanation 
differs essentially from that of the marginal utility the- 
orists;! [Boehm-Bawerk] cannot." 

Boehm-Bawerk insists that Die'tzel's explanation, if a 
full one, must go farther and explain the value of the dis- 
placed fact, the cost; this cost value must find its explana- 
tion in marginal utility : 

The less material and labor it requires to make a coat, so many 
the more coats from the same goods ; so much the lower down 
the utility curve can satisfaction extend, so much the lower the 
marginal utility of coats. By service to marginal utility [Grenznut- 
zen] the cost goods come to be valued. Not cost, but utility, then, 
is at the end of the causal series. 

Here again is some of the talk that has given rise to the 
identification, through cost, of marginal utility with value. 
Surely marginal purchase price, whether of a consumption 
good or of a cost good, is capable — all differentials aside — 
of standing as the equivalent of price; but it is equally 



CLASSICAL VERSUS MODERN 349 

clear that the volume of supply items has something to say 
as to how far down upon the curve of demand the mar- 
ginal item will be found. And only one page back mar- 
ginal utility was itself stated as a result of the relation 
between need and provision for need. 

And, as Boehm-Bawerk goes on to say, not the techno- 
logical fact — the good or the labor applied — is final as 
cost, but the value of it ; the technological aspect is merely 
a secondary influence in the case, as bearing upon the 
quantum of the supply. 

Now this is clearly entrepreneur analysis, and as such 
is correct in giving precedence to the value aspects of the 
production goods ; though it remains true that it is only as 
based upon the technological efficiency of the production 
goods, as underlying the production of things of value, 
that these production goods have any value. But once 
again let it be said that entrepreneur costs are themselves 
not final facts in value causation, but only the method of 
expression by which, in an entrepreneur economy, the final 
facts attain manifestation. The quantity of production 
goods, as mere mechanical facts — technological capital — 
has bearing upon the quantity of the product. But quan- 
tity of product does not directly determine value; only 
through supply in its relation to demand does the quantum 
of product reach a value standing; thereby the production 
goods obtain, through entrepreneur bidding, their value. 
If there is any one thing fundamental in all this, it is not 
the value costs, but the volume of production goods. And 
still the volume of production goods must in turn receive 
an explanation, not only as an aggregate, but also as a 
share directed to the service of any particular line of 
supply. The first question, that of the aggregate supply of 
production goods, goes back to the original environmental 
situation, or to an account of the genesis of instrumental 
goods through the intermediary of savings and capitaliza- 
tion. The second problem, that of the distribution of the 
instrumental goods between different lines of production, 
leads over into the demand side of the value equation ; 
given at any time the aggregate supply of different com- 
modities, how are these adjusted to one another in 
exchange relations — market values? and how, in view of 
their existing volumes, do production goods, through entre- 



35° VALUE AND DISTRIBUTION 

preneur bidding, receive their market values, get dis- 
tributed among the different industries, modify the value 
levels for products, and thereupon get revalued and 
redistributed ? 

But, while Boehm-Bawerk regards the old school and 
the new as at issue upon the nature of costs, he finds 
Dietzel to be after all in essential agreement with the later 
doctrine; as against Dietzel the issue is solely as to which 
of the two influences, cost and marginal utility, is cause 
and which effect. Dietzel's position is that both are cause 
and both effect, in some final and ultimate sense. Upon 
this issue Boehm-Bawerk's argument is clear and con- 
vincing to the point of brilliancy : Material causation is 
easily misunderstood and misapplied; a tree may be the 
cause of an acorn, and the acorn in turn the cause of a 
tree, but not of the same tree ; poverty may cause drunken- 
ness, and this in turn cause poverty, but not the same 
poverty. Concretely the same things, the same objective 
facts, cannot be both cause and effect. Dietzers position 
is a logical impossibility. 

Note here, however, that the question is so far only 
whether utility — or marginal utility, or subjective worth — 
is or is not the cause of cost ; and surely on this point there 
can be no doubt as to which category in economic produc- 
tion is primary — demand or supply. But upon the further 
question whether, as an entrepreneur fact, cost causes 
value, or value cost, it is not so clear which is right, or that 
either is right; neither costs of production nor values of 
products are to be accepted as ultimate causes; rather both 
are to be regarded as effects of desires for products, as 
over against human productive powers in conjunction with 
the environmental equipment of productive opportunity and 
productive instruments. The causal sequence runs, human 
desires and needs being taken for granted, from produc- 
tion goods and human productive powers, more or less 
scarce or abundant relatively to the needs, to the more or 
less of products relatively to the needs, thence to the rela- 
tive exchange powers of products, thence to the relative 
exchange powers of the productive agents and instruments. 
On the supply side, the primary term of the causal series is 



CLASSICAL VERSUS MODERN 351 

the instrumental goods and powers — but not these goods 
and powers in their value aspect. 

But evidently all of this reasoning is upon a level of 
value analysis deeper than the entrepreneur categories and 
underlying these categories, — a stratum of thought to which 
the cost category is irrelevant, otherwise than as mere 
expression or manifestation of the underlying facts which, 
under the competitive management and bidding of entre- 
preneurs, are making themselves effective through the 
leveling and proportioning mechanism of entrepreneur 
costs. The entrepreneur, however, is prone to accept the 
values of the cost facts as opaque and ultimate causal data 
determining the values of products by determining the 
supplies of them. 

But Boehm-Bawerk is right in insisting that the value 
aspect attaches to the production goods only by way of 
derivation from the value of the product. But it is equally 
true that the limitation of supply, whereby value arises, is 
upon the products only as a derivative from the limited 
supply of agents. And, in fact, Boehm-Bawerk says as 
much; his argument for his aspect of the truth runs as 
follows : Priority of time is not the point ; there is no 
summer till after the spring, but the spring does not cause 
the summer. The value of the product is explained by the 
fact that the production goods are not in superfluity; put 
with this the demand, and value comes both for products 
and for cost goods, — that is, the product has value by virtue 
ultimately of the same cause that gives value to the pro- 
ductive good. None the less the value of the product is 
farthest back in the chain of causation; the production 
good gets its value from the value of the product. So corn 
is not high because rent is paid, but rent is paid because 
corn is high. If the art of smelting ore were lost, iron ore 
would become valueless, but not iron; while to forget the 
methods of using iron would render both iron and iron ore 
valueless. So a corner in brick will carry up the prices of 
brick, together with the quotations upon stocks in brick 
corporations; but prices of brick cannot be raised through 



352 VALUE AND DISTRIBUTION 

an advance in the market quotations upon brick stocks, 
etc. — all excellent, if only it all mattered, if, in truth, the 
causation were finally with the value of the produced good. 
But it is, at any rate, clear that it is not finally with the 
costs of the produced good. 



CHAPTER XIX 

THE POSITIVE THEORY AND NATURAL VALUE 

It is not surprising that in the Positive Theory a goodly 
part of Boehm-Bawerk's discussion of market-vakte costs 
is found within the chapters upon "Subjective Value." ^ 
That between subjective cost, market- value cost, collectiv- 
ist cost, and entrepreneur cost, there is a shifting so 
continuous that one is rarely sure of precisely what is 
being discussed, must fairly be accorded this m^uch of justi- 
fication, that Boehm-Bawerk himself does not recognize 
the importance of the distinctions. But the distinctions are 
none the less important, and it is for the most part in the 
failure duly to recognize them that the Austrian view of 
cost falls so far short of consistency and adequacy. 

The later theory, Boehm-Bawerk says, explains value 
by "the marginal utility which a good is capable of render- 
ing; that is to say, it depends on its future employment,"^ 
and not on the value of the production goods consumed in 
producing it, not on the conditions of its origin; the deter- 
mination is forward-looking. 

Lest this be understood as denying the influence of 
costs, let it be kept in mind that the discussion here is of 
subjective worth, and that marginal utility for this purpose 
has itself already been made a matter of costs, but all the 
while forward-looking, — a question, that is, of what sacrifice 
of other values, or sometimes, doubtless, of effort, will 
result. 

And it may again profitably be said that any form of 
value must run in terms of some condition or sacrifice 
imposed upon the having or the keeping. The criticism 
urged is merely that the cost of the marginal utility, the 
value of it, should, as a concept, be kept rigorously distinct 
from the marginal utility itself. And, after all is said, it 
remains true also that the very concept of marginal utility 
itself is a cost concept. That the esteem, the significance, 

^ Positive Theory, Book III. 
'^Positive Theory, p. 179. 

353 



354 VALUE AND DISTRIBUTION 

the emphasis, but not the utility, accorded to each item in 
the whole stock is reduced to the level of the marginal item, 
is, in last analysis, as much a doctrine of cost, of substitu- 
tion, as the method by which the subjective worth of the 
marginal utility is found to be determined by that last and 
least-cherished item of some other series. But the last 
item in any one stock cannot, as the cost of any other item, 
be offered as basis or measure of value, because, as merely 
exchanging against duplicates of itself, no light is thrown 
upon the question of its exchange power. 

But Boehm-Bawerk ^ shows that the value [subjective?] 
of a production good — by the very fact that it is not a con- 
sumption good and can therefore have, in its own right and 
ultimately, no utility — is not derived from its own marginal 
utility, but only from the marginal utility of the product. 
"The value must be high when the dependent satisfaction 
is important, and low when it is unimportant." * 

This seems to be a subjective value formulation, and, 
as such, needs, perhaps, no criticism for lack of relativity; 
but surely as a market-value formulation the doctrine 
would require restatement to read: "The value will be 
high when the dependent satisfaction is relatively impor- 
tant, etc." 

But here the difficulty again presents itself that, in close 
analysis, the subjective worth of a production good, Hke 
that of a consumption good, is determined not by the 
dependent utility itself but rather by the cost aspect of the 
dependent utility; which cost may as well be found in the 
mere labor cost of the production good as in the displace- 
ment of some potential product: for, according to the Aus- 
trian view, the utility of the marginal good may not, after 
all, be determined by its own utility but by its displacement 
of other utilities, or possibly by its own labor cost. The 
cost principle, as here invoked to arrive at the subjective 
value of the consumption good, implies that the subjective 
value of any production good must be found, not in the 
marginal utility of its product, but in the subjective value 
of its marginal product; not, that is to say, in its marginal- 
utility productiveness, but in the marginal cost of this pro- 
ductiveness. 

^Positive Theory. * Ibid., ■p. i8o. 



POSITIVE THEORY AND NATURAL VALUE 355 

But, in point of fact, it is not possible even here to be 
sure that the discussion is in the subjective-value field; for, 
in confirmation of the argument, appeal is made to market- 
value phenomena, and to that very "law of costs 

Experience shows that the value of most goods is equal to 
their 'costs.' But costs are nothing else than the complex 
of those productive goods which have value .... [and] 
must be expended in the making of the products." ^ 

Suppose that one has three similar production goods, 
any one of which will suffice for the production of con- 
sumption good A, B, or C, the A product having a mar- 
ginal significance of lOO, B of 120, C of 200; 
the production good must have a value of 100: "The value 
of the productive unit adjusts itself to the marginal utility 
and value of that product which possesses the least 
marginal utility among all the products for whose produc- 
tion the unit might, economically, have been employed." ^ 

"The Wert of goods which have a higher individual 
marginal utility is put on a level with the value of the 'mar- 
ginal product' — as we shall call that product which has the 
least marginal utility." "^ 

Here we note that marginal utility and Wert are pre- 
sented as not necessarily equal ; the Wert of the non-mar- 
ginal product is made equal to the Wert of the marginal 
product, since the production goods — deriving their value 
from the marginal application — dictate as costs their lower 
value to products possessing higher marginal utility but 
requiring only equal costs. 

We seem here to be in the field of subjective worth — 
though all the while this is not to be certainly asserted. 
But, at any rate, why is the 100 use marginal? that is, why 
are there only three production goods? Probably because 
other productive openings have left no larger provision of 
agents for the three wants in question. Even on the indi- 
vidual basis, then, there is something relational here, and 
something backward-looking. 

Boehm-Bawerk's doctrine that value is the sum of mar- 

* Boehm-Bawerk, op. cit., p. 183. 

'Ibid., p. 186. ''Ibid., p. 181. 



356 VALUE AND DISTRIBUTION 

ginal costs, each of these costs getting its value from its 
least valuable use, would be true, so far as it goes, if only 
these marginal costs were fully analyzed into an indiffer- 
ence between marginal uses. But here a distinction must 
be drawn between isolated or collectivist production as 
against competitive production. The displacement, as 
opportunity idea, applies to competitive production only 
through the individual computation. The entrepreneur is 
as readily marginal through his outlay for the cranberry 
patch as for some productive good having an alternative 
application. To the entrepreneur there is the clearly 
defined alternative by virtue of which he becomes marginal, 
viz., whether or not to apply his capital power to the hire 
of the cranberry patch. And in point of fact also, the cran- 
berry patch has alternative applications, in the sense that it 
has different and competing relations of adaptation and of 
desirability to different men; the successful bidder has not 
necessarily to bid his maximum, but only to outbid his 
most willing competitor. It is thereby rare that, in 
market-value problems, the producer nearest to the margin 
is really upon the margin, — rare, that is, that cost ever quite 
equals value. That the case is not precisely the same with 
Crusoe, or in collectivist production, is due to the fact that 
in the isolated economy, cost resolves itself mostly or 
entirely into the alternative- want aspects of production, 
into the resistance pull of other demands. That Boehm- 
Bawerk, despite the fact that he is citing and discussing 
a market-value doctrine, is proceeding upon the group con- 
c-ept of cost, instead of upon the competitive concept, is 
shown in the following: 

If we are considering what a good .... of higher immedi- 
ate marginal utility is worth for us, we must say first of all, it is 
worth exactly as much as the means of production from which we 
could reproduce it at any moment. Then if we examine further 
how much the means of production themselves are worth, we come 
to the utility of the marginal product.^ 

It is, indeed, passing odd that the principle of displace- 
ment is applied here but is not accurately applied to competi- 
tive costs ; but in competitive cost the principle is more 
difficult to apply, as complicated with questions of individual 
capacity and preference. In competitive production the 
costs are fixed, in part by the market prices of production 

^ Boehm-Bawerk, op. cit., p. i88. 



POSITIVE THEORY AND NATURAL VALUE 357 

goods, and in part also by the alternative openings offered 
for the personal activity of the entrepreneur ; he is not, in 
any ordinary case, appreciably an influence to affect the 
conditions. Yet in his small share, whether he be a mar- 
ginal producer or not, he does have an effect. Labor, or 
land, or capital uses, acquire their market value as produc- 
tive agents through the competitions of producers bidding 
for the help of these agents. The value is not the mar- 
ginal-value contribution of the agent, but is the price 
adjustment at the level of the marginal bid, — not the possible 
but the actual bid in view of the actual value contribution, 
or, — put more accurately so as to cover the interest- 
discount modification, — it is the price set at the marginal 
bid in view of the present worth of the expected future 
value contribution. But the competition of producers is 
ordinarily not drawn from one field of production alone ; 
the quantity of agents at the service of one line of produc- 
tion is commonly, though not always, mostly a question of 
the alternative pull of entrepreneurs in other industries. 

Cost, from the individual point of view, is therefore truly 
a question of displacement, but sometimes of displacement 
of agents from one productive use to another, sometimes 
of agents from other competing hands to the producer's 
hands. The higher of the two amounts functions 
as the cost quantum. So, for example, if land costing the 
tenant lOO rent may be made to render him 103 of service 
in corn or 105 in wheat, the land cost of the wheat is not 
100 but 103. That is to say : The cost of the agent under 
consideration will be expressed either as the money sig- 
nificance of the agent in some alternative employment under 
the management of 'the holder, or as the money outlay 
imposed by the bidding of competing entrepreneurs ; and 
the true cost will be the larger of these two value quanti- 
ties. Thus, while we may acquiesce in Boehm-Bawerk's 
statement, "that even when the law of costs holds, costs are 
not the final but only the intermediate cause of value," this 
acquiescence must import a meaning different from that 
intended by Boehm-Bawerk ; it cannot be admitted that 
demand has anything more to do with value than has cost, 
unless in the ultimate sense that all economic activity traces 
back to want, and that even competitive costs are more 
commonly than, otherwise the expression of alternative 
demands. And we must dissent unqualifiedly from the 



358 VALUE AND DISTRIBUTION 

general proposition that "it is only this many-sided char- 
acter of most cost goods, their capacity for being employed 
in many different uses, that gives the appearance of the 
contrary." ^ This statement is uniformly true only of the 
isolated or socialized economy. But doubtless it is some- 
times true of competitive production; that is, it may, as we 
have already seen, be the case that in any particular entre- 
preneur's hands an agent be on the point of being turned 
by him into another line of production ; against the use that 
he is making of an agent, the highest bid is not that of 
some competitor but is his own bid for use in another line 
of product. 

In Wieser's treatment of costs and of value, the dis- 
cussion chiefly concerns that which he terms "Natural 
Value," — collectivist value — value arising "from the social 
relation between amount of goods and utility, or value as it 
would exist in the communist state." ^^ 

That this manner of approach is for many purposes 
most serviceable is not to be denied; but to be a working 
concept, it must assume that in administration all indi- 
viduals are regarded not merely as entitled to equal con- 
sideration, but as precisely similar in all relevant aspects ; 
or, if the discussion is to throw light upon exchange-value 
problems, that an equal quantum of purchasing power 
is assigned to the different claimants under the collectivist 
distribution. 

Wieser points out that, under present conditions, goods 
are not distributed according to their maximum service in 
consumption, but according to strength of purchasing 
power; exchange value estimates luxuries high and neces- 
saries low ; error, fraud, force, private property, and social 
inequality disturb the case: "In natural value goods are 
estimated simply according to their marginal utility; in 
exchange value, according to a combination of marginal 
utility and purchasing power." ^^ 

" Boehm-Bawerk, op. cit., p. 189. 
^^ Wieser, Natural Value, p. 60. 
^Ibid., p. 61. 



POSITIVE THEORY AND NATURAL VALUE 359 

In a certain sense, truly, all prices are costs, as terms of 
sacrifice upon which all goods are obtained. But an 
entirely intelligible and analyzable value situation might 
obtain under conditions in which cost of production could 
have no part, as, for example, under the government 
suppl3'-distribution system at an Indian agency. So W^ieser 
rightly remarks that the elementary theory of value con- 
siders "that goods come into men's disposal without requir- 
ing to be first produced," ^^ but, as one infers, with equality 
of purchasing power somehow established in the society, 
or with some assumed preliminary and temporary distri- 
bution of the consumption goods. In such conditions, land 
and capital could have no value. But "if we do away with 
this assumption [of non-production], we obtain the natural 
laws of value in production." ^^ 

So, under socialism, Wieser says : 

There must be land rent [land differentials] In such a 

state it would not form personal property, but it would be calcu- 
lated separately in the total income of the community, and that on 
essential grounds, namely, in order to find out what is the quota 
which individual lands contribute to total return, and to judge 
therefrom what outlay may and ought to be expended to obtain this 
quota. In other words, the economic-technical service, that of 
controlling production, would remain, while the personal part it 
plays, as a source of private income, would fall away." 

Now, not at all denying the service, both expositional 
and doctrinal, of this point of view, it is perhaps the more 
to be regretted that so often there slip in competitive con- 
cepts and illustrations, rarely clearly distinguished, and 
that the point of view appears to be in perpetual flux 
between collectivism and competition. In truth, here, as 
with Boehm-Bawerk, the reader finds that the difficulties of 
distinguishing between subjective- and objective- value doc- 
trines are extreme. 

Seemingly upon considerations both of expositional 
advantage and of logical priority, Wieser takes up the 
problem of distribution as fundamental to the doctrine of 
costs, — which, perhaps, is as well as the other way about, 
since either method must tacitly involve one or the other of 
two assumptions ; either that value and distribution are dis- 

^Ibid., p. 61. ^Ihid.. p. 61. ^^ Ibid., p. 63. 



360 VALUE AND DISTRIBUTION 

tinct problems, or that one solution may be made derivative 
from the other. "The consideration that, from production 
goods, one can obtain a return in goods which possess 
not only utility but value, gives production goods their 
value." ^^ "But," as Wieser rightly says, "the proposition 
that production goods obtain their value from the value of 
their returns, suffices for the co-operation of the co-operat- 
ing productive factors as a whole, not for their valuation 
individually." Thus value must explain costs as an aggre- 
gate, but until we find the principle of imputation, "the 
valuation of production goods [separately] will remain an 
enigma." ^® 

Nor is it possible, as Menger thought, to arrive at the 
contribution of any one item by assuming its loss. Three 
goods. A, B, and C, co-operating together may give a value 
of 10, while any two of them together or applied in other 
combinations would give a value of only 6. By Alenger's 
reasoning this would assign to each a value of 4. But 3 
times 4 is more than the value of all working together. 
The advantage which a good renders is, therefore, not to 
be calculated by the loss which will come with its loss, but 
by the gain which does come with its possession.^'^ The 
actual employment is the one from which computation 
should be made, and not the employment which might have 
been resorted to, if something not as good as was done had 
had to be done. The three factors in combination produce 
a surplus of i over what they could produce separately or 
in any other combination ; it was because of this surplus 
that they were put together ; to the extent of this surplus 
there is something to be divided which the method of sub- 
traction cannot distribute. 

But will this specific productivity solution serve better? 
The truth is that men bid for instruments of production to 
go with their own labor or to supplement an existing stock, 
because, with the new factors, the old become more pro- 

^' Wieser, op. cit,, p. 70. " Ibid., pp. yz, 78. " Ibid., p. 85. 



POSITIVE THEORY AND NATURAL VALUE 361 

ductive ; but there is no occasion for ascribing the total of 
this joint and co-operative increase either to the old or to 
the new factors. Market values for productive contribu- 
tions can, indeed, be worked out of situations of this sort — 
the market is doing it daily and hourly — but never any 
measure or purported expression of- the value productive- 
ness. 

To a hunter, rifle and cartridge together may have a 
great Wert ; as a necessary fact in the combination, either 
may be said to have all the worth ; alone neither would have 
any of it. And likewise, if there is only one artist who can 
do a given thing, and only one item of material on which or 
with which the thing can be done, there is no theoretical way 
of dividing the finished product. But if either factor can 
be replaced, the deadlock is broken; and if there are differ- 
ent combinations enough into which the different produc- 
tion goods are entering, the market will solve, from all the 
different equations, the values of the different unknown 
quantities : so^ from 

;r-|-3;=:ioo 

43'+5^=590 
it may be deduced that .r^40, 3/=6o, and 5'=70. "The 
sum of all the productive contributions exactly exhausts the 
value of the total return." ^^ 

But — it is to be objected — the entrepreneur must all the 
while be here as a fourth fact, and the adjustment of 
market value must take place through entrepreneur bid- 
ding. There are, then, accurately no such equations as 
jf-f-y^ioo, etc. ; the sum must be a different one with each 
different entrepreneur, since each of all the different goods 
must hold a different productive relation to each different 
entrepreneur. The outcome will be one ascribing to the 
instrument or agent as remuneration the sum expressing 
merely the highest entrepreneur bid for it by virtue of its 
productivity relation to this particular entrepreneur, — that 
is to say, the highest value offer. 

"/Wrf., p. 88. 



362 VALUE AND DISTRIBUTION 

But it is at any rate true, as Wieser rightly insists, that 
the vahie of each productive good is in part conditioned 
on the existence of goods capable of co-operating with it, — 
on complementary goods. Land has greater value as capi- 
tal goods increase; labor greater value as the land is 
better. 

According to Menger .... the farmer who loses his cart 
horse, loses only the value of the animal, whereas .... he 
suffers, beyond this, some disturbance in the value of his remaining 
productive wealth.^' 

Every productive good .... has ascribed to it a greater 
effect than it could obtain through its own powers; .... on the 
other hand, .... a lesser effect .... than might be expected 
from the degree of dependence in which the complementary goods 

stand to it The imputation assigns in this way a medium 

share Of land, capital, and labor there is nothing to be 

said except that, together, they bring forth everything; alone, 
nothing.^" 

But note here that just how or why the outcome is as it 
is, cannot be made clear without the assumption of the 
entrepreneur fact, with all the differences in entreprenetir 
capacity, in capital equipment, and in personal preference. 
Wanting this aspect, and full allowance for it, we have only 
a mystery. 

Noting also that the foregoing passage seems to appeal 
to the actual market, and that a part of it so appeals in 
terms, so that we are left in our chronic doubt as to 
whether and how far we are in the "natural-value" reckon- 
ing, the further development of the argument becomes of 
interest. The marginal law for production goods is asserted 
to follow that for consumption goods; 

In every stock of consumption goods, every unit receives its 
value from the marginal utility; thus the value which the products 
are expected to have is already adjusted to the marginal level, 
and the value of the production goods, as derived from this, is 
consequently placed, from the beginning, on the basis of the 
marginal value.^^ 

But production goods may be used to create products 

"Wieser, op. cit., p. 91. ^ Ibid., pp. 92-94. '^ Ibid., p. 97. 



POSITIVE THEORY AND NATURAL VALUE 363 

of different kinds. "In each kind, taken by itself, the 
vahie of the product is adjusted to the level of its particular 
marginal utility." -- And since these margins of utility in 
the different kinds of goods are rarely, if ever, precisely 
equal, "production stocks must always be employed in such 
a way as to bring forward those products which will secure 
the greatest possible satisfaction of want." And goods 
not all having the same marginal utility, — gold for the filling 
of teeth and gold for gilding not fully corresponding in 
utility, — "it is quite impossible in the two kinds of employ- 
ment to keep always exactly to the same marginal amount ;" 
it is sufficient if no rearrangement will bring a higher 
utility.^^ 

Here again, not attempting to be quite certain whether 
the discussion is wholly collectivist in reference, though 
most of it surely is, and merely remarking these further 
cases of mix-up between marginal utility and value, or 
Wert, we are especially interested to observe that the differ- 
ence in the utility of gold for teeth as against any other 
employment does not appear, in Wieser's thought, to 
depend upon differences in buyers' purchasing power, but 
solely upon the fact that the marginal need with reference 
to teeth may be much greater than any other need, even the 
highest, for gold for other purposes; but the value will 
correspond to the cost — to the displacement — in these minor 
uses. This, then, definitely asserts that value is often less 
than marginal utility, and so is one more recognition that 
marginal utility and value are distinct concepts, and are 
quantities not interchangeable, and that value is the cost 
aspect of utility. 

But now recurring to the doctrine that "land, capital, 
and labor together bring forth everything, alone nothing," 
and that "the sum of the productive contributions exhausts 
the whole return," these statements, if accepted as true, 
must, as we have seen, be interpreted to include the entre- 
preneur as laborer, as co-operating factor of production, 
and also as the director in the distribution of product. Of 
land, capital, and labor, as compensated under rent, inter- 

^Ibid., p. 97. 

"^ Ibid., p. 98, passim. 



364 VALUE AND DISTRIBUTION 

est, and wages, and with no account made of profits, the 
proposition does not hold. And when we are asked to 
"suppose these productive elements employed on the most 
rational plan possible," we seem to be assuming that all the 
employed agents are precisely alike relatively to entrepre- 
neurs in general, or that all are upon the market-value basis 
fully interchangeable, and that all entrepreneurs are pre- 
cisely alike in all relevant aspects, — no part of which is in 
any wise permissible of assumption. For competitive pro- 
duction at least, these three productive agents must be taken 
as somehow including the employer, the valuer and bidder 
fact, or must assume as somehow in the background a 
fourth productive element, the human director; and he is 
always a different man. There is, then, no such thing as 
one most rational plan or combination of productive 
factors, unless this presupposes a one best entrepreneur. 
And in fact, under equally skilful but different entrepre- 
neurs, different combinations of productive factors must be 
the best combinations. There is, therefore, for any particu- 
lar production good, no such thing possible as one specific 
marginal use or marginal service or marginal utility or 
marginal productivity, as attributable to it in its own right 
and independently, or even as dependent solely on the rela- 
tion of the agent in question to some other production good 
or goods, but only as also related to the situation and apti- 
tudes and needs of a specific entrepreneur. There must, 
then, be as many specific marginal productivenesses as there 
are different entrepreneurs to come into relation with the 
good in question. The fallacy of the "marginal contribu- 
tion" of any particular productive good is parallel to that of 
the marginal utility of consumption goods upon the market; 
in neither case is there room for more than a marginal rela- 
tivity. For market-value purposes, the marginal productive 
contribution does not exist, but only the market value of 
the contribution, as the outcome of competitive bidding, 
based upon the significance, for individual purposes, of the 
good in question, — whether siii generis or as one good out of 
a stock of similar goods, — as forming a part of a particular 
entrepreneur complex. The purchaser of the production 
good may or may not be near to paying for it all he can; 
and while with one item out of a stock the quasi-rent fact 
is probably a smaller quantity than in case of an isolated 
good, there is no reason to suppose that it is entirely non- 



POSITIVE THEORY AND NATURAL VALUE 365 

existent. As applied to the inner relations of the entre- 
preneur complex, the doctrine here insisted upon with so 
much emphasis is, indeed, merely an application of Wieser's 
general doctrine: "We only estimate it [the farm horse] 
at a portion of the decrease that would ensue were the 
owner obliged to farm without it." ^* To value the horse 
according to all of the loss is to value it at more than one 
would need pay, and is at the same time to make it impossible 
to pay for the other goods upon a similar basis, or even to 
pay for them what under competitive conditions would 
need be paid for them. 

Wieser fails, however, to see that, in point of fact, the 
accurate attribution or imputation of productiveness is 
impossible upon the market, simply because it is impossible 
inside the entrepreneur complex. The entrepreneur him- 
self cannot tell how much the good in question produces 
for him, but only how much he can afford to pay for it to 
go with his other goods and his own productive powers, 
rather than to go without it. 

In joint production the specific productivities of the dif- 
ferent productive agents are clearly not obtainable; and in 
truth also, the productivity of any agent working in isola- 
tion is not obtainable, simply because no good ever so 
works; the entrepreneur fact, the director, is always in the 
background, and the productivity is therefore a produc- 
tivity relative to him ; thus the productivity must be a differ- 
ent one with each different entrepreneur. But even if this 
be somehow not entirely past question, it surely is clear that 
the aggregate productiveness of agents employed in com- 
bination is greater than the sum of their powers in isolated 
production, that it is precisely for this reason that they 
are placed in combination, and that the increment of product 
from the very fact of combination is a joint product not 
accurately to be distributed in terms of specific and dis- 
tinguishable productiveness. In some slight measure, at 
least, there must be in every case some question of joint 
surplus product like that of the rifle-and-cartridge case, 
or like the case of the unique painter and unique material. 
The only practicable analysis is that of the entrepreneur 
who attributes to himself as profit all that he does not have 
to pay for the co-operating goods ; but it is obvious that this 
analysis sacrifices accuracy to practicability. 

^Wieser, op, cit., p. 91. 



366 VALUE AND DISTRIBUTION 

This appeal to the entrepreneur computation and the 
entrepreneur bid supplies the missing link in the argument 
of Wieser with reference to the different equations ; some- 
how, he says, the market, out of all the different equations, 
arrives at a marginal-utility imputation for each productive 
good. If it really does so, and so far as it does so, it is 
done by the bidding of entrepreneurs : 

To each single item or quantity is imputed the smallest contri- 
bution which under the circumstances can be economically arrived 
at by the employment [employer] of the particular item or quantity, — 
the marginal contribution [the marginal employer's bid based on 
contribution] .... or, looking at it from a different point of 
view, the marginal product [product to the marginal employer, if 
only this were accurately ascertainable]. 

Productive elements which admit of only one kind of employ- 
ment do not share the multiplicit}^ of conditions necessary for the 
emergence of what we recognize as costs.^ 

This will be recalled as substantially the view adopted 
by Boehm-Bawerk as the relation of monopoly goods to 
cost of production, monopoly goods being understood by 
Boehm-Bawerk to mean, in this connection, scarce goods, 
goods not reproducible at will, like land, exceptional ability, 
etc. But it must be noted that Wieser's doctrine does not 
exclude the goods from cost bearing on the ground of 
scarcity or of non-reproducibility, but only because of the 
want of alternative applications. And this is unquestion- 
ably good cost doctrine for collectivist or for Crusoe eco- 
nomics. And if it were possible to make certain that 
Wieser is all the while in the collectivist analysis, there 
could be no room for serious criticism, except to point out 
that the application to competitive economics, if not made, 
calls imperatively to be made, and to point out also that, if 
made upon the basis left possible by Wieser, it can be made 
only with the utmost of difficulty, — or, if readily made, 
must almost certainly be erroneously made. IVEonopoly 
goods, in the sense of land or of high ability, are cost goods 
in either type of reckoning, to the extent, at least, of the 
alternative applications. But in the competitive economy, 
any production good is a cost good to the extent that it 
necessitates a cost outlay to command it. In the accurate 

°* Wieser, op. cit., p. 175. 



POSITIVE THEORY AND NATURAL VALUE 367 

sense, indeed, the displacement principle applies here ; the 
productive good could have served in the hands of another 
entrepreneur ; the expense incurred by the renting entre- 
preneur might have been otherwise directed. 

This is perhaps the point at which to discuss a forcible 
and plausible objection against regarding as a cost the rent 
paid for a good having only one productive application, the 
cranberry patch, for example. It may be speciously urged 
that the rent advanced by the tenant, or foregone by the 
cultivating owner, while a cost charge in the individual 
reckoning, and in that sense a cost, has yet no cost-causal 
bearing upon market value ; the land will be used by some- 
one; the rent is not a condition to the productive function- 
ing of the land ; it will be used by some other cultivator, if 
the present cultivator refuses the rent outlay ; our cranberry 
patch, being good for nothing for any other purpose, cannot 
be driven, because of low rent, into other uses, and will 
remain in the cranberry service, whether or not the owner 
sell, or the tenant abandon to another cultivator; the cran- 
berry patch is therefore not a fact through which the supply 
term of the value equation may evince any of that flexi- 
bility whereby prices receive their modification. 

But evidently thus much might be argued for capital and 
for its remunerations, with only a long-run distinction 
possible for such lands, if there are any, as are independent 
of upkeep and incapable of exhaustion. But there is no 
reason why cranberry land, or any other cultivated land, or 
any form of specialized instrumental good, may not, with 
time enough, be exhausted; that is to say, most instru- 
mental goods, however specialized, are in the long adjust- 
ment mobile in their capital-value aspect. 

But it must be admitted that goods of no alternative 
use differ from other goods with respect to the effect of a 
diminishing demand for products, that is, differ with 
respect to the degree of elasticity in supply, but differ 
nevertheless only in degree. With falling prices, some 
acres, or what amounts to the same thing, some intensive 
possibilities, of the cranberry field will be abandoned, — will 
not, it is true, go into other lines of product, but none the 
less will go ; the labor and capital — the expense — go in part 
elsewhere; and if the entrepreneur departs leaving a new 



368 VALUE AND DISTRIBUTION 

tenant to follow him, this new tenant will fail to utilize the 
land at the old degree of efficiency, at the same tension 
of productive power; and the new tenant is himself not as 
efficient a producer as the old, — was in fact outbid by the 
earlier tenant on the earlier level of prices, this earlier 
tenant now finding the cranberry enterprise at the present 
level of prices not worth his while.^^ 

Supply conditions have then been somewhat disturbed. 
But the degree of bearing of costs upon value is in any 
case easily exaggerated, — which fact was in Mill's mind 
when he argued that only relative wages and relative profits 
should figure as costs. But if only those outlays not pro- 
portionate to efficiency rendered are reckoned as costs, the 
situation will become hopeless of analysis for cost purposes. 
Because of differences in entrepreneurs, and thereby differ- 
ences in the relations of efficiency to outlay, and because of 
the different technological conditions of different lines of 
production, there is nothing for the case but to reckon all 
outlays as costs, and for that matter, also, all tediums, 
repugnances, and counter-attractions, whether absolute or 
relative. 

But it remains true that only differences of cost, relative 
to efficiency, seriously affect the value outcome. We must, 
however, view as costs all that the entrepreneur regards as 
burden in arriving at his choice of occupations, all that he 
charges up against the chosen occupation as a resistance 
to production and as necessary to be overcome in his market- 
price remuneration. All his outlays rank for him as data 
in making his choice between lines of activity. It is, indeed, 
only as working out through entrepreneur computations 
and entrepreneur competitions, that production goods of 
any sort acquire value or rental, or rank as costs, and come 
thereby to have their little or much bearing on the relative 
volumes of goods seeking exchange against one another. 
That there is, for any purpose, a not greater relative supply 
of production goods — whether of non-alternative use or of 
many uses — is the reason for relatively few products, high 

^^ It is, however, true that cases may be imagined where no expense 
or labor of upkeep is necessary, — a cranberry patch, for example, where 
the more one should disturb it the less satisfactory would be the 
results. But even assuming such a case, the most that can be said is 
that it does not matter whether rent is or is not reckoned as a cost, 
since the supply is independent of all cost influences. 



POSITIVE THEORY AND NATURAL VALUE 369 

prices, and a high value level for the production goods in 
question. Ultimately cost is a way of expressing that we 
cannot have more of the agent unless upon more expensive 
terms — perhaps not even then — and can have what we have 
only upon the present terms of expense. But the explana- 
tion of the actually existing limitation upon the supply of 
production goods may or may not be in the diminutions and 
diversions due to other industries ; it may simply be that 
there are no more agents. For the purposes of competitive 
production, Wieser's and Boehm-Bawerk's view that a good 
is not the basis of a cost imless the good has alternative 
applications amounts practically to saying that nothing can 
be a cost once that is not a cost twice. This view implies 
also that some distributive shares for employed agents are 
not costs at all, thus raising the question whether distribu- 
tion need, on Wieser's own basis, have been treated prior 
to costs. 

"Practically," Wieser says, "it would seem to come to 
this ; that the imputation of the share due to the monopoly 
goods is made after that due to the cost goods is finished."^^ 
This appears to be Ricardo's old rent-and-cost doctrine, 
albeit possibly none the worse for that. But Wieser adds, 
though with precisely what significance is not at all clear, 
that 

it is only in the individual case that such a calculation can be 

made A suflBciently wide consideration shows that 

monopoly goods come altogether under the ordinary conditions of 
valuation, and differ from other economic goods only that they 

display much more strikingly the character common to all 

Only the greater part, not the whole, of the "undivided residue" is 
to be imputed to the good in question.^^ 

Bearing in mind that, for the most part, the criticism 
here made attaches only to the relation set up between dis- 
tributive shares, and bearing in mind also that, interpreting 
monopoly goods merely as scarcity goods, — non-reprodu- 
cible goods, — there is no very considerable objection to be 
made to the doctrine presented in its bearing upon present 
issues, it yet remains to be repeated that, purely as distribu- 
tive doctrine and subjected to the requirements of theroeti- 

^^ Wieser, op. cit,, p. no. 
'^ Ibid., pp. no, III. 



370 VALUE AND DISTRIBUTION 

cal accuracy, it will not stand. The entrepreneur is always 
in the background to share in or to take the residue in ques- 
tion; it therefore cannot all go to the hired scarcity good; 
the entrepreneur is himself a monopoly good for the pur- 
poses of the case ; this makes two monopoly goods. ^^ 

As we have already seen, there is danger of confusing 
with each other two different sorts of land differentials, 
(i) the entire value differential measured from the rentless 
margin, or, as it is sometimes viewed, from the lowest-rent 
land in use; and (2) a quasi-rent form of differential 
expressing value-wise the superiority of land for one use 
over its best alternative use. This second sort of land dif- 
ferential, as representing no displacement, could not, in a 
collectivist economy, be computed as cost. The other dif- 
ferential, the ordinary rent of competitive production, 
would be irrelevant to collectivist computations. For ques- 
tions of cost in the competitive econom}^, the case is just the 
other way about ; all competitive rent paid is cost ; the 
quasi-rent differential is as cost irrelevant.^" 

Wieser appears to confuse these two rent concepts, 
though this can be asserted only hesitatingly, because of the 
difficulty of being positive as to whether the discussion is in 
the collectivist, the natural-value, field, or in the field of 
competitive production. The early portion of his chapter 
on "Land Rent as Cost" ^^ seems to imply that rent as a 
general differential of value productivit}^ — rent measured 
from the rentless land margin — is no part of cost; which 
would be meaningless for collectivist purposes, and untrue 
for competitive purposes. But he asserts that "when all 
lands and all powers of the land .... bear rent," the 
rent must be included; and this also, as applied to collect- 
ivist production, must be untrue, irrespective of its seeming 
implication that all powers of the land can ever be rent-bear- 
ing. At the very close of the chapter, however, it is said: 

^ The same criticism applies to the following : "The personal 
income which land yields is, in the last resort, dependent upon the fact 
that the land in question yields a return such that, after the shares of 
capital and labor are deducted, there remains a share which must, on 
natural laws, be imputed to the land." — Wieser, op. cit., p. 114. 

'" And there is really another concept of rent, the superiority 
of a particular piece of land for a particular use over the poorest of 
land devoted to that use ; but this third form does not concern this 
particular discussion. 

*^ Wieser, op. cit.. Book V, chap, xiii, p. 217. 



POSITIVE THEORY AND NATURAL VALUE 371 

"That the rent of land does not enter into cost can be legiti- 
mately applied only to land devoted of necessity to one dis- 
tinct use, such as mines, vineyards, and the like," — an 
accurate statement if intended only as a natural-value 
doctrine. 

But upon the same page, in substantial conformity with 
the views already discussed of Mill, Jevons, Patten, Hob- 
son, and others, but still not clearly in the competitive field, 
Wieser goes on to show that "if a fertile field is employed 
as site for a factory, the agricultural rent which in other 
circumstances might be expected from it ... . cannot 
be neglected in calculating the costs of the factory's 
products The differential rents which are surren- 
dered take effect as costs." This appears, on the whole, to 
be competitive doctrine and as such is unacceptable: if it is 
really intended as collectivist doctrine, the talk should be of 
the products possible, and not of the surrendered rents. 



CHAPTER XX 

THE ATTEMPT AT RECONCILIATION: MARSHALL^ 

Marshall's treatment of demand price is a great advance 
over that of the Austrians, and is in the main firmly and 
consistently held, both in terminology and in essential 
thought. Whether so much can be said for his analysis of 
supply price is not so clear. 

And there are some inadequacies in his discussion of the 
relation between utility and price, in that, at times, he 
seems to believe that price may, after all, to the individual, 
stand as a measure of marginal utility.^ 

^ The sth edition of Marshall's Principles comes to hand as the 
present work is passing through the press. It has not seemed 
practicable entirely to rewrite this chapter, nor — from such 
hasty examination of the new edition as has been possible — would 
this appear to be called for ; thus, wherever in the new edition the 
original citation has been found without substantial change, the fact 
is so indicated by parenthetical referen'ce. 

^ "The price will measure the marginal utility to each purchaser 
individually : we cannot speak of price as measuring marginal utility in 
general, because the wants and circumstances of different men are 
different." — Alfred Marshall, Principles of Economics, 4th ed., Mac- 
millan, 1898, p. 174 (5th ed., p. 99). 

And in criticism of Jevons, it is said : "He has led many of his 
readers into a confusion .... by speaking without qualification of 
the price of a thing as measuring its final utility, not only to an 
individual, which it can do, but also to 'a trading body' which it 
cannot do." — Ibid., p. 176, note (sth ed., p. loi). 

"For each of [two men, one rich, one poor] the marginal 
utility is measured by sixpence ; but this marginal utility is greater in 
the case of the poorer man than in that of the richer." — Ibid., 
p. 170 (5th ed., p. 95). 

In fact, however, as Marshall would probably be the first to admit, 
the sixpence gives neither any general measure of utility nor any 
measure to any particular individual. The price that one is just 
willing to pay is an expression of the relation in utility of the good 
under consideration to other goods purchasable with the same money, 
but gives no information as to the absolute utility of any of these 
different goods. 

372 



ATTEMPT AT RECONCILIATION 373 

Substantially, however, Marshall recognizes the real 
nature of the demand margin : 

The clerk who is in doubt whether to ride to town, or to walk 
and have some little extra indulgence at his lunch, is weighing 
against one another the (marginal) utilities of two different modes 
of spending his money.^ 

On the supply side the meaning is less easy to arrive 
at and the adequacy of the doctrine less clear. 

In the line with the cla'ssical writers, Marshall has a 
doctrine of real cost, but in just what way, if at all, it is 
articulated with his doctrine of money cost or expenses of 
production is not evident. It is said that with labor con- 
ceived as the only productive fact, "the price required to 
call forth the exertion necessary for producing any given 
amount of a commodity may be called the supply price for 
that amount." But with labor and capital in co-operation, 

the exertions of all the different kinds of labor that are directly 
or indirectly involved in making it; together with the abstinence or 
rather the waitings required for saving the capital used in making 
it; all these efforts and sacrifices together will be called the real cost 
of production of the commodity. The sums of money that have to be 
paid out for these efforts and sacrifices will be called either its 
money cost of production, or, for shortness, its expenses of pro- 
duction; they are the prices which have to be paid in order to call 
forth an adequate supply of the efforts and waitings for making it; 
or, in other words, they are its supply price.^ 

This appears to say that real costs are the costs to the 
people who sell or rent their various services to the entre- 
preneur; while money costs are costs from the 
point of view of the entrepreneur. This is surely 
a valid distinction, if only, over against the danger 
of confusion through it, there are counterbalancing 
advantages. But is it true that the quantum of 
the sacrifice in effort and waiting has anything to do with 
the quantum of the payment? How close and how definite 
is the relation? Is there in real costs any basis for money 
costs ? What is the connection ? What is the reason that it 

^ Ibid., p. 193 (sth ed,, p. 118). 
*Ibid., p. 418 (5th ed., p. 339). 



374 VALUE AND DISTRIBUTION 

takes three dollars instead of two to command the day's 
service of a carpenter, or six dollars for the mason? Is it 
a matter of the effort pain purely, or has what the laborer 
can get somewhere else the more to do with it? The iden- 
tification of supply price with the necessary price is admir- 
able and illuminating. But why are these prices thus or so ? 
Marshall leaves it to be inferred that the solution traces 
back to real cost ; but he does not say so, nor does he attempt 
to trace any connection. And again, these money pay- 
ments in compensation of the real costs seem to be identified 
with the supply price, the entrepreneur cost; this leaves, as 
part of necessary or minimum cost, nothing for the entre- 
preneur. But if "the supply price of a commodity is the 
price at which it will be delivered for sale" to those who 
demand it, this price must be more and other .than mere 
expense cost. 

But two or three pages later the normal supply price 
is presented through the device of the representative firm, 
its normal expenses of production being taken as the 
normal supply price, but these expenses being interpreted to 
include gross earnings of management.^ 

^Marshall, op. cit., p. 422 (5th ed., p. 343). 

This representative-firm notion, is so widely accepted in later 
theory, and its influence so important for good or ill, that some 
especial attention is called for in order to determine the precise nature 
and content of the notioru Is it a long-time or a short-time concept? 
If the price of any particular time is determined by the cost to the 
representative firm of that time, is this to be taken as, for the purpose, 
an abandonment of the marginal analysis? What about the costs of 
the firms of lower grade? Do these firms fall short of receiving for 
their costs full indemnity from market prices? Or are their profits 
merely smaller, but adequate ? And what is to become of these poorer 
firms ? and when ? and why ? 

Or if the doctrine points not to present costs and their explana- 
tion, but only to the long-time adjustment, are we to understand the 
representative firm to be one that, in the trend of competitive forces, 
is likely to acquire control of the market, a long-time best firm, or 
rather a long-time average firm, or a long-time marginal firm ? 

And whether or not the commensurability of price with marginal 
entrepreneur cost, rather than with cost on marginal land, is 
taken to hold in agriculture, is it to be understood that, in 
manufacturing, some better or best firm fixes the price ? And if so, is 
this victory price to be regarded as expressing any cost quantum with 
respect to this better or best firm ? 

If the representative-firm notion is an abandonment of the 
marginal analysis, is it a substitution of the method of averages and 



ATTEMPT AT RECONCILIATION 375 

Since business ability in command of capital moves with great 
ease horizontally from a trade which is overcrowded to one which 
offers good openings for it; and since it moves with great ease 
vertically, the abler men rising to higher posts in their own trade, 

normals ? Or are we rather looking for the marginal cost of an 
average firm, long or short time as the case may be ? 

And if, because there are all sorts of ups and downs in business, 
normals and averages are to rule, why is not the average method 
equally valid for labor computations in the cost problem, the value 
of masons' or doctors' or lawyers' services coming to coincide with the 
wage or salary of the average or representative man in the occupa- 
tion — taken at the time of his medium earning capacity? 

And if we have in some sort to do with the average principle, 
shall we take the representative firm to be simply and merely an 
average firm, or the long-time average of pretty much any firm, or 
the long-time average of an average firm? And average in what 
respect ? In size ? In skill of management ? In good fortune ? In 
methods ? In manner of organization ? 

But all these problems may perhaps reach their solution with the 
unfolding of the concept : precisely what is a representative firm ? 

"Though in manufacturing, at least, nearly every individual 
business, so long as it is well managed, tends to become stronger the 
larger it has grown ; and though prima facie we might therefore expect 
to see large firms driving their small rivals completely out of many 
branches of industry, yet they do not in fact do so" (p. 371) (5th ed., 
p. 241). 

"When a man has got together a great business, his descendants 
often fail, in spite of their great advantages, to develop the high 
abilities and the special turn of mind and temperament required for 

carrying it on with equal success For a time, indeed, all may 

go well By mere assiduity and caution, availing them- 
selves of the traditions of the firm, they may hold together for a long 
time. But when a full generation has passed .... the business 
almost invariably falls to pieces unless it is practically handed over to 
the management of new men who have meanwhile risen to partnership 
in the firm" (p. 379) (sth ed., p. 299). 

"The superintendence of labor is but one side, and often not the 
most important side of business work The ideal manufac- 
turer .... must have the power of forecasting the broad move- 
ments of production and consumption He must be a natural 

leader of men, .... a power of first choosing his assistants rightly 
and then trusting them fully ; of interesting them in the business and 

of getting them to trust him The abilities required to make 

an ideal employer are so great and so numerous that very few persons 
can exhibit them all in a high degree" (p. 377) (5th ed., p. 297). 

"It is obvious that the son of a man already established in 

business starts with very great advantages over others It 

would, therefore, at first sight seem likely that business men should 
constitute a sort of caste" (pp. 378, 379) (5th ed., p. 298). "But we 
may read a lesson from the young trees of the forest as they struggle 
upwards through the benumbing shade of their rivals. Many succimib 



376 



VALUE AND DISTRIBUTION 



.... in modern England the supply of business in command of 
capital accommodates itself, as a general rule, to the demand for 
it; and thus has a fairly defined supply price. Finally, we may 
regard this supply price of business ability in command of capital 

on the way, and a few only survive ; these few become stronger with 
every year, they get a larger share of light and air with every increase 
of their height, and at last in their turn they tower above their neigh- 
bors, and seem as though they would grow on forever, and forever 
become stronger as they grow. But they do not. One tree will last 
lonjger in full vigor and attain a greater size than another ; but 
sooner or later age tells on them all. Though the taller ones have a 
better access to light and air than their rivals, they gradually lose 
vitality ; and one after another they give place to others, which, though 
of less material strength, have on their side the vigor of youth. 

"And as with the growth of trees so it is with the growth of 
businesses. As each kind of tree has its normal life in which it attains 
its normal height, so the length of life during which a business of any 
kind is likely to retain full vigor is limited by the laws of nature 
combined with the circumstances of place and time, and the character 
and stage of development of the particular trade in which it lies" 
(pp. 394, 395) (5th ed., p. 315). 

But that all this is both truly and beautifully said leaves it still to 
be asked what it means for the purpose. Certainly there are all sorts 
of firms, and all degrees of flux and change among them ; but so there 
are all sorts of wage-earners, of independent producers, of land, of 
machines ; and it has sometimes been thought that by the very fact 
of all these differences, the marginal analysis is imperatively imposed. 
And does it at all matter to the doctrine that, more and more, 4:he firm 
organization is giving way to the corporate? But to continue: 

"There is no rule of universal application ; but .... as a gen- 
eral rule subject to important exceptions, an increase in the total volume 
of any branch of production tends to increase the average size of the 

businesses engaged in it Many .... economies depend 

directly on the size of the individual establishments engaged in the 

production An increase in the aggregate scale of production 

of course increases those economies which do not directly depend on the 

size of individual houses of business Correlated branches of 

industry .... mutually assist one another The economies 

arising from such sources as this, which are accessible to any branch 
of production, do not depend exclusively on its own growth ; but yet they 
are sure to grow rapidly and steadily with that growth ; and they are 
sure to dwindle in some, though not in all respects, if it decays" 
(p. 396) (Sth ed., p. 317). 

"When we come to discuss the causes which govern the supply 
price of a commodity, we shall have to analyze carefully the normal 
cost of producing a commodity, relatively to a given aggregate volume 
of production ; and for this purpose we shall have to study the expenses 

of a representative producer for that aggregate volume We 

shall not want to select some new producer just struggling into busi- 
ness, who works under many disadvantages, and has to be content for a 
time with little or no profits, but who is satisfied with the fact that he is 



ATTEMPT AT RECONCILIATION 377 

as composed of three elements. The first is the supply price of 
capital ; the second is the supply price of business ability and energy ; 
and the third is the supply price of that organization by which the 
appropriate business ability and the requisite capital are brought 

establishing a connection Nor on the other hand shall we 

want to take a firm which by exceptionally long-sustained ability and 
good fortune has got together a vast business, and huge well-ordered 
workshops that give it a superiority over almost all its rivals. But 
our representative firm must be one which has had a fairly long life, 
and fair success, which is managed with normal ability, and which has 
normal access to the economies, external and internal, which belong to 
that aggregate volume of production" (p. 397) (sth ed , p. 318). 

But does this mean that the price at any particular time must be 
the cost to this firm at this mid-time of its career ? It seems so : 

"The normal supply price of any amount of that commodity may be 
taken to be its normal expenses of production (including gross earn- 
ings of management) by that [the representative] firm This 

is the price the expectation of which will just suffice to maintain the 

existing aggregate of production A price higher than this 

would increase the growth of the rising firms, and slacken, though it 
might not arrest, the decay of the falling firms, with the net result of an 
increase in the aggregate production. And, on the other hand, a price 
lower than this would hasten the decay of the falling firms, and slacken 
the growth of the rising firms ; and on the whole diminish production" 
(p. 422) (sth ed., p. 343). 

But none of this appears to involve any appeal to representative 
or average phenomena ; it is rather a typical marginal analysis ; but — 

"Anyone proposing to start a new business in any trade .... 
if himself a man of normal capacity for that class of work, .... 
may look forward ere long to his business being a representative one, 
in the sense in which we have used this term, with its fair share of the 
economies of production on a large scale. If the net earnings of such a 
representative business seem likely to be greater than he could get by 
similar investments in other trades to which he has access, he will 
choose this trade" (p. 449) (5th ed., p. 377). 

This evidently takes the representative firm to be something like 
an average firm ; and it is here said that any average man who con- 
cludes that in the trade in question he would turn out to be an 
average man, will go into the trade if he notices that the average man 
in that trade is doing better than average men outside. True, as a 
doctrine of opportunity cost ; but it does not need the assumption of 
average men to be true. Any inferior or superior man will act in 
precisely the way outlined, if he believes that men of his grade are 
finding the trade in question more remunerative than other trades to 
which he has access. And there is nothing in any case to indicate 
that the cost of this average man will coincide with the price of the 
product, or to indicate that the cost of the marginal man will not so 
coincide. Thus the quotation as it continues presents a mistaken 
deduction : 

"Thus that investment in a trade, on which the price of the com- 



378 VALUE AND DISTRIBUTION 

together. We have called the price of the first of these three ele- 
ments interest; we may call the price of the second taken by itself 
net earnings of management, and that of the second and third, taken 
together, gross earnings of management.^ 

In substance this is evidently an opportunity-cost analysis 
of the reasons for the movement of entrepreneur ability and 
entrepreneur capital from one industry to another ; it has no 
necessary relevancy to the representative or to the average 
firm, and depends for its correctness upon no assumption of 
this sort. Accurately, however, it does imply a firm or a 
situation where the wages of superintendence are only just 
large enough, etc., — "the price the expectation of which will 
just suffice to maintain the existing aggregate of produc- 
tion," a marginal-cost price, as it would seem. But this 
appears not to be Marshall's idea, nor is it possible — to this 
writer at least — to make out quite precisely what the idea 
is ; the notion of the representative firm appears to lack 
something in point of theoretical tangibility. 

Perhaps, however, the doctrine points to a firm which, 
in the long-time adjustment, with all its ups and downs, 
will pass for a marginal firm. But whether this be safely 
assumed or not, Marshall's necessary price must be, on the 
full showing, taken to include more than mere outlays, — 
must be understood as allowing for the entrepreneur share. 
But we still await information as to what determines the 

modity produced by it depends in the long run, is governed by estimates 
on the one hand of the outgoings required to build up and to work a 
representative firm, and on the other of the incomings, spread over a 
long period of time, to be got by such price" (p. 449) (sth ed., p. 377). 

"The aggregate production for a general market is the outcome of 
the motives which induce individual producers to expand or contract 
their production. It is just here that our device of a representative 
firm comes to our aid. We imagine to ourselves at any time a firm that 
has its fair share of those internal and external economies, which the 
average scale of production in that trade will cause to accrue to such a 
business" (p. 514) (sth ed., p. 459). 

This last quotation puts the case as, indeed, one of an average 
firm, but not, seemingly, a firm of average size, but a firm that by its 
ability or by its organization — whatever the size — strikes a fair average 
of the economies of productions ; this average cost will, it is inferred, 
be the market price. But as the same page shows, the cost in question 
is the marginal cost of this average firm : 

"This then is the marginal cost on which we fix our eyes ;" and 
the marginal summary reads : "We thus get at the true long-period 
marginal cost, falling with a gradual increase of demand." 

'Marshall, op. cit., p. 392 /sth ed., p. 313). 



ATTEMPT AT RECONCILIATION 379 

amount of this share. Is real cost its basis, or is there an 
opportunity-cost reckoning somewhere in the background?'^ 

In an earher chapter,^ it is aid: "While demand is 
based on the desire to obtain commodities, supply depends 
mainly on the overcoming of the unwillingness to undergo 
'discommodities.' These fall generally under two heads : 
labor, and the sacrifice involved in putting off consumption." 
The "discommodity" in the labor is stated to include bodily 
or mental fatigue, unpleasant surroundings or unpleasant 
companions, injury to health, and displacement of recrea- 
tion. 

Now, while this account of demand and supply would, 
as we have seen, do for the social product conceived as a 
unit aggregate, it clearly will not apply to explain the pur- 
chasing dispositions with reference to different classes of 
goods relatively to one another, and will not serve to formu- 
late the forces of resistance to the production of the various 
different lines of supply; as a method of elucidating the 
problem of the exchange relations between goods, nothing 
but confusion results from this affiliation of market costs 
upon real costs. Not only this ; but while this catalogue of 
real costs unquestionably contains some items of true pain 
quality — costs in this real sense — the concept is wrongly 
permitted to include the loss of recreation pleasure, which 
is not a cost at all in the sense of pain, but only of oppor- 

^ On page 217 (5th ed., p. 142) of the Principles, Marshall writes: 
"It is broadly true that the exertions that any set of workers will make, 
rise or fall with a rise or fall of the remuneration that is offered 
them;" "which may be true for each separate man under different levels 
of payment, but hardly true of different men relatively to each other, 
and hardly true of all men as affected by a general rise of wages ; but 
Marshall continues : "As the price required to attract purchasers for 
any given amount of commodity, was called the demand price, .... 
so the price required to call forth the exertion necessary for producing 
any given amount of a commodity, may be called the supply price for 
that amount." 

Now not only is there overmuch suggestion of labor-pain cost here 
but also it is difficult to make out whether Marshall at all recognizes 
the importance of alternative remunerations. He does not so indicate ; 
the question seems to be one of absolute exertion rather than of rela- 
tive, and this without attention to the alternatives in results ; and yet in 
his analysis of demand price he has clearly and satisfactorily recognized 
the principle of competing and resisting alternatives of consumption. 

* Book IV, chap, i, p. 215 (sth ed., p. 140). 



380 VALUE AND DISTRIBUTION 

tunity. And on the side of capital costs, also, there is a 
parallel error; the putting-off of consumption is a sacrifice 
of a present good, a resistance to be overcome, but it is of 
a different category from pain burden ; it is merely a choice 
between two desirable things ; it cannot safely be forced into 
the pain-cost, the real-cost, classification. Demand points to 
the sacrifices of purchase; cost, to all the sacrifices of pro- 
duction ; but whose sacrifices and whose production ? Here 
again, however, it is difficult to determine how far, on the 
whole, Marshall is open to criticism upon this point. For, 
in substance, he appears to abandon the doctrine of real 
cost as having any significance for exchange relations. 
He recognizes that much productive activity takes place 
entirely or mainly for its own sake, e. g., in literature and 
in science, that much more is performed for the benefit of 
others, and that "even where a man is working for hire, he 
often finds pleasure in his work ; but he generally gets so 
far tired before it is done that he is glad when the hour of 
stopping arrives." ^ Perhaps even "he might rather work 
for nothing than not work at all," but not generally: But 
if at all, what becomes of the real-cost doctrine? Nor is 
there great help in the fact that there is marginal exertion 
and marginal production, for even so, the margin may be 
one of choice between pleasures, — nor help in the fact that 
the work willingly done gets paid by the measure of the 
rest, or, as Marshall puts it, that "the price of the whole is 
governed [ ?] by the sacrifice required from him by that 
part of the labor which he gives most unwillingly, and is on 
the verge of refusing to give." ^° This marginal resistance 
may still be wholly one of choice between pleasurable occu- 
pations, a cost by displacement of recreation. 

"Marshall, op. cit,, p, 216 (5th ed., p. 141). 

"^^ Ibid., p. 216. 

Marshall's position as to the relation of rent to price forces him 
into some regrettable propositions in the direction of making marginal 
influences "determining" facts rather than mere "precisioning" facts ; 
as, for example, when he says of the classical doctrine, "that the 
price .... is determined by the expenses or money cost .... 
on the margin of cultivation ; and that rent does not enter into cost, 

these phrases are true in the sense in which they were meant 

Those parts of the produce which yield a surplus will generally be pro- 
duced even if that price is not maintained ; while there is no surplus 
yielded by that portion of the produce the expenses of production of 
which do take direct part in governing the price." — Marshall, op. cit., 
p. 477. 

But when the rent-cost position is not in hazard, the correct 



ATTEMPT AT RECONCILIATION 381 

But whatever the doctrine of real cost may be taken to 
signify, it is at any rate clear that Marshall's analysis really 
accepts and adopts the point of view of entrepreneur cost : 
"The easiest as well as most practical course is to go 
straight to production for sale in a market." ^^ 

The undertaker cares little for real cost: "He thinks 
chiefly of the expenses of production and seldom pays much 
attention to the efforts and sacrifices to which those pay- 
ments more or less closely correspond," and which consti- 
tute the "real" cost of production. "The modern 
business man commonly takes the payments which he has to 
make, whether for wages or raw material, as he finds 
them ; without staying to inquire how far they are an accu- 
rate measure of the efforts and sacrifices to which they 
correspond." ^^ 

This should doubtless better read "to which they do not 
correspond;" marginal individual cost^ the sundown mar- 
gin, gives no hint of the degree of "real" cost, but only 
asserts the equality ratio between the utility of the product 
and the forces resisting the production, whether by burden, 
or by utility foregone, or by both. The different personal 
wages or profits are world-wide from the correspondence 
of remunerations to pains ; it is a commonplace that the 
dirtiest and the most disagreeable occupations pay the 
least." 

doctrine gets its dues ; after saying on page 427 : "The remainder of 
the present volume will be chiefly occupied with interpreting and limit- 
ing the doctrine that the value of a thing tends in the long run to 
measure its cost of production," he calls attention to the fact that this 
is not precisely to say that it tends to be fixed or governed by its 
cost of production : "We might as reasonably dispute whether it is the 
under or the upper blade of a pair of scissors that cuts a piece of paper, 
as whether value is governed by utility or cost of production." 

But this is not inconsistent with the view — for the most part held 
by Marshall — that the two margins together determine the price. 
But in a note on page 580, the case is admirably and accurately put 
as follows : "The withdrawal of iron from any one of its necessary 
uses would have just the same influence as the withdrawal from its 
marginal use," 

" Marshall, op. cit., p. 476. 

'^^ Ibid., pp. 430, 431 (5th ed., pp. 351, 353). 

" Despite the fact that the discussion here avowedly concerns 
itself not with the laborer's pains, discomforts, and sacrifices, but 



382 



VALUE AND DISTRIBUTION 



But once again, what about the entrepreneur's services as 
items of costs? "In calculating the outgoings, the head of 

with the employer's wage expenditure — not with the capitalist's for- 
bearings and abstinences, but with the borrower's outlay of hire, — the 
temptation is yet almost irresistible to investigate the causes of the 
facts, to set afield to explain what, to the entrepreneur, are brute and 
definitive data, but which are evidently world-distant from ultimate 
resting-places for thought. Cairnes, it will be recalled, was so 
impressed with the ultimate character of human life, in its expression 
by effort and pain, so impressed also with the non-finality and non- 
reality of the entrepreneur point of view and computation, that, breaking 
with Mill, he abandoned it entirely as a significant cost category. 
Ricardo had based entrepreneur cost upon real cost, only by assuming — 
perhaps as self-evident, but at any rate without any attempt at proof — 
the proportionality of wage outlays to labor burdens ; and as to the pro- 
portionality of interest compensations to abstinence claims he had 
greatly worried, but had on the whole believed the divergence not hope- 
lessly wide. Marshall appears to follow Ricardo both in doctrine and in 
argumentative method. 

But if the costs are not fixed by the pains, how then are they fixed ? 
Pain and discomfort and ill repute have obviously something to do with 
the case, even admitting that they have not all. The mind will not rest 
contentedly and indefinitely at the superficial entrepreneur-cost level of 
explanation ; we must somewhere turn from the mere opaque hoiv much 
to ask the why of the hoiv much; if we explain value by the value of 
the costs, shall we not somewhere find an explanation of the value of 
the costs ? And if nothing else offers, shall we not take labor pain 
as explanation? And where can we reach bottom unless in terms of 
human life as expressed in human labor and in human pain? 

But the level of explanation next underlying the mere entrepreneur 
quantum is the level at which, mainly, opportunity cost offers its service ; 
but it is at this level that the relative pains and the relative pleasures 
and remunerations of different lines of activity have chiefly to be con- 
sidered. How great a supply of any agent may be had in any industry 
or under any entrepreneur, and on what terms of outlay, is, no doubt, 
in part determined by the relative irksomeness or disagreeableness or 
ill repute of the employment in question : but in part, also, and com- 
monly in much the larger part, by the relative remunerations possible in 
competing industries or under competing employers. That is to say, 
the seller of labor efficiency, like the land- or the capital-owner, com- 
putes his refusal price— in part or entirely — according to what may 
be had in another market or under another employer in the same 
market. 

But it must be admitted that this opportunity-cost line of explana- 
tion, even when it is complete in its inclusion of all pain and pleasure 
and product aspects, is not ultimate ; it explains some values merely in 
the light of competing values ; it resolves values of products into 
values of costs. But, by going over to the supply of instruments, by the 
adoption of the standpoint of the employee rather than of the employer, 
it is so far better than the mere entrepreneur point of view, in that 
it does in some measure explain the entrepreneur situation. But are the 
values of the costs finally and adequately explained through this appeal 



ATTEMPT AT RECONCILIATION 383 

the business must reckon in the vahie of his own work," " 
but there is no suggestion that this vahie has any other basis 
than its real cost, its burden-pain significance. And, in 
point of fact, not all of the value of the entrepreneur's 
services can be computed as cost, but only that part which 
represents displacement, the opportunity of gain, or a 
recreation or other pleasure foregone, — the most desirable 
alternative ; more accurately, the amount of money necessary, 
as against any other total of resistance or inducement, to 
keep him at the production in question, is the cost volume 
in question. What remains over and above this necessary 
compensation, the surplus called unnecessary profit or pro- 
ducer's quasi-rent, is no part of cost. And it is surely bad 
terminology to call one's own work, or the usance value of 
one's own property, an expenditure ; but this is not a serious 
matter. Doubtless, however, Marshall, like Cairnes and 
like practically all other economists, appreciates that "the 
business man is constantly striving so to modify his arrange- 
ments as to obtain better results with a given expenditure or 
equal results with a less expenditure ;" ^^ and that individual 
effort has to be somehow allowed for as expenditure, or in 
some other way and to some extent be computed in cost.^^ 
But the application of the proposition to all the different 
outlays obscures, or altogether hides, its especially impor- 
tant theoretical aspects as applied to individual effort. 
And, as we have already had occasion to observe, this doc- 
trine, if consciously held and thoroughly worked out, is the 
doctrine of opportunity cost.^'^ 

to the employees' competing value opportunities? The competing 
opportunities are themselves also value-derived rather than value- 
explaining. It is at this point that, as ultimate determinants, the 
situation, the actually controlling conditions, the man-and-environment 
general status of things, assumes its place as ultimately the causal fact. 

"Marshall, op. cit., p. 433 (5th ed., p. 354). 

^' Ibid., p. 433 (sth ed., p. 355). 

^' Flux (Economic Principles, p. 52), Seager {Introduction to 
Economics, p. 157), Fetter {Principles of Economics, p. 274), and 
Seligman {Principles of Economics, p. 354) all adopt this extended 
sense of the word expense ; there must then, it seems, be some advan- 
tage in it or excuse for it that the present writer has not appreciated. 

" Fetter, Flux, Seager, Carver, and Seligman all recognize, more 
or less consciously and completely, this opportunity-cost aspect of 
necessary price. 

Fetter: "The entrepreneur's cost determines the lowest price at 



384 VALUE AND DISTRIBUTION 

On page 449 (5th ed., p. 377) is a paragraph which 
looks somewhat toward the opportunity-cost doctrine. 
After remarking that capital (in the sense of the entre- 
preneur concept) goes in large measure toward building 
up internal organization and trade connections, and is alto- 
gether lost with the cessation of the concern; and that one 
who is starting a new business must reckon upon this 
chance of loss, Marshall says that a man of normal (aver- 
age?) capacity may fairly expect his business to become 
representative (average? marginal? price-determining?) 
with its fair share of economies: 

If the net earnings of such a representative business seem likely 
to be greater than he could get by similar investments in other 
trades, he will choose this trade. Thus that investment of capital in 



which he can continue to sell" (p. 274). However, Fetter also says: 
"Alternative cost is manifold and indefinite. The thought is signiiicant 
at the moment of choice, but is not constantly measurable for practical 
purposes. Money cost is the practical cost" (p. 274). 

Flux: "Supply price .... must be a price sufficient to cover 
cost of production, and if competition be vigorous, the excess over cost 
of production will not be more than sufficient to afford such profits 
as competitors need to secure in order to continue in competition" 
(P- 57) ; which says that necessary supply price is cost ; but that each 
man must have as part of his necessary price something above cost, 
namely, what his competitors find to be a part of their necessary 
price ; and that this first man's necessary excess above this necessary 
price is his profit. 

Seager : "The expenses of production .... include minimum 
profits to the entrepreneur to remunerate him for his time and trouble" 
(P- 1 57)' "The amount which should be charged as wages of manage- 
ment or minimum profit is what the entrepreneur could obtain for his 
services if he worked for wages or for a salary for a corporation or 
other employer" (p. 159). 

Seligman's view is substantially like that of Seager : "The gross 
earnings would suffice to give him a bare compensation for his services, 
for otherwise he would enter into some other employment as a wage- 
earner" (p. 3S4). 

But why assume, for example, that the next best tune that any man 
can play must be played upon someone's else violin? 

Carver : "If a certain individual with a certain amount of labor 
and capital at his disposal can earn $1,000 a year by working for other 
people .... a piece of land upon which he with his capital can 
produce a total crop worth only $1,000 would be worth nothing to him, 
but one upon which he could produce a crop worth $1,200 would be 
worth approximately $200 a year." — Carver, The Distribution of Wealth, 
p. 188 (sth ed., p. 377). 



ATTEMPT AT RECONCILIATION 385 

a trade on which the price of the commodity produced by it depends 
in the long run, is governed by estimates on the one hand of the 
outgoings required to build up and to work a representative firm, 
and on the other of the incomings spread over a long period of 
time to be got by such a price. 

This comparison is, however, of alternatives of capital 
investment rather than of personal remunerations; but as 
applying to capital, it may be open to the opportunity-cost 
interpretation. Still, strictly interpreted, the passage seems 
to say no more than this, that the long-run price depends 
on the proportion between the expenses on the one side, 
against incomings on the other. But whether the passage 
really covers, or is intended to cover, opportunity cost, 
Marshall makes later no further use of the principle. 

KENT AND COST 

Marshall's treatment of the relations of rent to cost is 
perhaps the least satisfactory portion of an admittedly 
masterly work. 

He treats both extensive and intensive margins — when 
both are — as equally rentless and equally price-determin- 
ing, without apparent wonder that the costs should be pre- 
cisely equal in the two cases, both nevertheless being 
independent causes, and there existing no causal nexus 
between them : "Rent is here taken as another name for the 
surplus produce which is in excess of what is required to 
remunerate the cultivator for his capital and labor." ^^ 

But this statement strictly interpreted would carry to 
the landlord as land rent all producer's quasi-rents, in the 
sense of occupation differentials. And even though this 
form of quasi-rent receives scant recognition from Marshall, 
it still remains to ask what are the determinants and the 
measure of the remuneration required by the cultivator for 
his capital and labor. 

These doctrines (that the price .... is determined by the ex- 
pense or money cost .... on the margin of cultivation; and that 
rent does not enter into cost) do not mean that a tenant farmer need 

not take his rent into account He must count his rent in just 

the same way as he does any other expense. What they do mean is 

^* Marshall, op. cit., p. 477. 



386 VALUE AND DISTRIBUTION 

that when the farmer is doubting whether it is worth his while to 
apply more capital and labor to the land, then he need not think of 
his rent.'" 

But this argument would also exclude interest wages 
and profits from cost; for, as Marshall himself points out 
a few pages later, the question whether one shall push a 
piece of land harder or shall rent more land "is of the same 
kind as the question whether he shall buy a new plow, or 
try to get a little more out of his present stock of plows." 
This is the marginal problem with plows ; this marginal 
use "pays nothing net toward the net income earned by the 
plow." 20 

But this is no more than to leave cost to be based on 
something other than payments for instrument services ; 
and this would lead to the acceptance of wages as the sole 
basis of marginal cost.^^ 

In point of fact, all that this doctrine excluding rent 
from cost amounts to is, either ( i ) that rent applies equally 
— if at all — to all the different costs of all the different pro- 
ducers in any given line of production, and thereby has no 
relative importance, since, as much as cost is higher or 
lower in rent, it is correspondingly modified in reverse 
order with regard to other expenses for other productive 
agents; or, (2) that when rent is paid there is a corre- 
spondingly and compensatingly larger product. 

" Marshall, op. cit., p. 478. 
^* Ibid., p. 492. 

^^ "A hop-grower, for instance, may find that on account of the high 
rent which he pays for his land, the price of his hops will not cover the 
expense" (p. 487). 

"Land is' but a particular form of capital from the point of view 
of the individual. The question whether a farmer has carried the culti- 
vation of a particular piece of land as far as he profitably can ; and 
whether he should try to force more from it, or to take in another 
piece of land, is of the same kind as the question whether he should 
buy a new plough, or try to get a little more work out of his present 

stock of ploughs He weighs the net product of a little more 

land against the uses to which he could put the capital sum that he 

would have to expend in order to obtain it That part of his 

produce which he is in doubt whether to raise by extra use of his 
existing ploughs, or by introducing a new plough, may be said to be 
derived from the marginal use of the plough. It pays nothing 
net .... towards the net income earned by the plough" (p. 492) 
(Sth ed., p. 430). 



ATTEMPT AT RECONCILIATION 3^7 

But whether under (i) or under (2), the argument 
applies as only within a given line of production, and 
thereby can have no significance for the exchange relations 
between different lines of commodities, the only point at 
which any application can have any real significance ; for 
the value problem is something more serious and more diffi- 
cult than that of explaining the exchange relations of one 
bushel of beans or of wheat with another precisely like it. 
And what about capital goods? Marshall points out — and 
rightly — that for the short-time adjustment, capital goods 
bear the same relation to price as does land; the quasi- 
rents upon capital goods are no more a cost than are land 
rents, since in the short run the supply cannot modify 
appreciably. But here the difficulty is that wages also will, 
upon this reasoning, fall out of the cost category, unless 
upon the assumption of a computation long enough, in 
point of time, for population to have adapted in volume. 
And even then, all the different problems as to the relation 
between the supply of labor and the remunerations of labor 
would present themselves. 

And worked out to its logical results, this rent-cost doc- 
trine would imply that, as a long-time doctrine, all capital 
costs would finally disappear ; for each producer is taken as 
devising and contriving how best to use his labor effective- 
ness in view of his abilities and of the environment with its 
opportunities, all conceived as means toward the productive 
result desired; shall it be this or that capital, or more or 
less of this or that? All costs thus resolve themselves 
ultimately into labor cost, — not labor-purchase or. labor- 
value cost, but a fragmentary sort of labor-opportunity 
cost. And thus, under this principle, no indestructible fact, 
nor the compensation for any indestructible fact, nor any 
destructible fact for the term and the measure of its exist- 
ence without upkeep, could figure as cost. And, finally, 
even labor could rank as destructible fact and its wages 
thereby function as cost, only under a reckoning long 
enough and at a rate of compensation low enough, if such 
level there be, so that laborers, failing to receive those 
necessary compensations, — computed according to some 
effective standard of life, or according to some minimum 
standard of subsistence, — should, in some measure, restrict 
their total number or effectiveness. 

But probably no one would, by such heroic logic, attempt 



388 VALUE AND DISTRIBUTION 

to resolve competitive costs into any such ultimate labor- 
opportunity cost as this. In the competitive reckoning, 
any given entrepreneur must pay to his labor enough not 
merely to keep it alive, but to prevent its appHcation, under 
some competitor, to the purposes of this competitor. And 
this appears to be as far as Marshall has thought it worth 
while to go. But this is an opportunity-cost analysis in the 
entrepreneur computation, which, upon the chosen level, 
calls for further application; for, under this reasoning, 
not merely the creation of capital, the upkeep of capital, 
and the improvement of land, but also the upkeep of land 
must be computed as costs, since otherwise the greater 
profit must be found in selling out the land piecemeal 
through the method of cropping and depriving of upkeep. 

But if opportunity is in any manner or degree to be 
recognized, the computation can hardly stop with problems 
of displacement costs related solely to the original creation 
of production goods. The goods being once in existence, 
and the supply of them being — by assumption — incapable, 
for a period, of modification, something still depends on the 
degree of their specialization ; and this applies irrespective 
of whether the goods in question involved, in their origin, 
any labor cost of production. Land, as we have seen, is, in 
a collectivist economy, the basis of a cost to the extent of its 
best alternative application ; and were it in any way legiti- 
mate to carry over this computation into a competitive situa- 
tion, the land use would, to this extent at least, function as 
cost in the competitive reckoning. In neither type of 
organization is it true that an instrument can function as a 
cost basis only after it has imposed a cost in its production. 
In any case, it is a cost to a collectivist society according 
to its displaced application; if produced, it had a cost under 
an earlier computation of displacement according to what 
might otherwise have been produced, — or, equally well, at 
the margin, a combined recreation-displacement and labor- 
pain cost. Under entrepreneur-cost computations, each 
productive fact is a basis of cost in any productive use 
according to the measure of what it costs the entrepreneur 
to use it in that particular way, — its highest displacement 
for him, whether this be expressed as its hire or as some 
outranking alternative application. 

Thus, if Marshall's attempt to exclude produced appli- 



ATTEMPT AT RECONCILIATION 389 

ances or their hire from the competitive-cost reckoning 
were approved, the reasoning, logically extended to apply 
to labor and its hire, would result either (i) in admitting 
the labor as cost only up to the point of its best alternative 
of productiveness, or (2) admitting the wage as cost only 
up to the point of the wages obtainable in the laborer's 
next best occupation, or (3) in denying for the wage outlay 
any cost significance until time should elapse for a new 
generation of workers to come upon the scene. 

The classical doctrine may be restated thus: (i) The amount 
of produce raised, and therefore the position of the margin of culti- 
vation .... are both governed by the general conditions of demand 

and supply (2) But rent takes no part in controlling the 

general conditions of demand and supply or their relations to one 
another. It is governed by the fertility of the land, the price of 
the produce, and the position of the margin; it is the excess of the 
value of the total returns which capital and labor applied to the 
land do obtain over those which they would have obtained under 
circumstances as unfavorable as those on the margin of cultiva- 
tion.^'^ 

This is in the main correct; rents do not afifect price, in 
any ultimate sense ; but the supply of land does, and, 
through the prices of products, affects land rents and land 
prices. So of wages and of interest, whether capital hire 
or time discount, the compensations are the result of the 
value contribution, as a question of the supply of agents 
and of the resulting products, as against the demand. So 
the fertility of the non-marginal lands with their quantum 
of product has much to do with the location of the margin. 
The conditions which make rent possible, and which affect 
the place of the miargin, affect price, but ultimately speak- 
ing, not through affecting rents ; rent is a cause only as the 
entrepreneur expression of the relatively limited supply 
of land instruments : the sequence is really the other way 
about. But rent is not "governed by the position of the 
margin," but simply reckoned from there ; the price of the 
product is the proximate cause, but is itself the result of the 
whole demand for product over against the whole supply ; 
and this supply volume traces back to the land supply as 
one of its causes. The causal sequence, in a competitive 
entrepreneur economy, runs, demand being assumed, from 

^Marshall, op. cit., p. 478 (sth ed., p. 427). 



39° VALUE AND DISTRIBUTION 

supply of land powers to the products of these powers, 
thence to price, thence to rents, and thence, under the time- 
discount principle, to the land value. This is, indeed, the 
sequence with all productive agents — supply "of them, sup- 
ply of products, price of products, pay of agent. Where, 
then, is the justification for reckoning any form of agent 
remuneration as a cost? In this, that to the individual 
seeking his most favorable application of his gain-making 
possibilities, all marketable agents contributing to the exist- 
ence of things of value are the basis of cost hires ; and 
these cost hires, to the extent that, through the necessity 
of them as outlays, they influence the individual's choice of 
occupations, are influences bearing as costs on the relative 
supply of products. It is true that, as bearing upon any 
individual's productive activity, it does not greatly matter 
whether he employs poor land at little rent, or better land 
at high rent, excepting so far as individual capacity or 
preference may play some part; but as matter of capacity 
and preference it does somezvhat matter. The rent pay- 
ment in either case makes a part of actual cost, and thereby 
forms a part of his basis of comparison of the costs upon 
various qualities of lands, and likewise forms a part of the 
data upon which his choice is made whether he shall produce 
one or another agricultural product, or shall produce some 
non-agricultural product as against any agricultural 
product. His cost of one product is, in the main, the alter- 
native attractiveness of some other line of production, as 
referred to the test of highest net advantage. It is by this 
comparison that he chooses his direction of activity, and in 
this comparison he includes his rent outlays, precisely as, 
to arrive at the highest net advantage from competing 
opportunities, he takes account of outlays in wages, capital 
hire, time discount, taxes, insurance, royalties, or blackmail. 
In short, cost of production is a matter purely of the indi- 
vidual psychology — a complex of influences combining into 
the one problem, a purely individual problem, of how the 
individual in question shall to his best advantage direct and 
apply the gain-controlling powers and agents in his control. 

But all of these cost outlays trace back, for their 
causation, to the conditions of supply of the respect- 
ive agents in view of the opportunities for their 
application, which agents receive their market values, 



ATTEMPT AT RECONCILIATION 39^ 

their prices, through the competition of the differ- 
ent producers, inchisive of the producer especially 
under consideration. These market prices, socially- 
established, stand to the individual producer as items of 
cost and- as data, among other data, in view of which his 
choice of gainful activity is made. That is to say, it is by 
the intermediary of individual relative costs and of the 
resulting choices of activity, that conditions of supply 
among productive agents make themselves felt in the rela- 
tive supplies of products, and thereby in the value of 
products, which value is reflected back upon the agents. 
Thus it is the limitation of the supply of agents — land, 
for example — and not the remuneration that is, on the cost 
side, the ultimate explanation of the value relations of 
products. Cost of production, in the competitive sense, 
applies here only to the sphere of individual activity, as 
tracing out, through the the individual's choice of activity, 
the influence of the supplies of agents upon the relative 
supplies of goods. As individual costs, all sorts of influ- 
ences enter, including every kind of outlay, but the leading 
influence, by virtue of which producers become marginal, is 
opportunity cost, the attractive influence of other industries. ^^ 
And all of this receives occasional recognition from 
Marshall : 

The rise of ground rents in the district will thus be an indica- 
tion of the scarcity of space which, other things being equal, will 
raise the price of retail goods ; just in the same way as the rise of 
agricultural rents in any district will indicate a scarcity of land 
which will raise the marginal expenses of production, and therefore 
the price of any particular crop.^* 

The cost of production of the marginal [agricultural] produce 
can he ascertained without reasoning in a circle. The costs of pro- 
duction of other parts of the produce cannot. The cost of produc- 
tion ofi the margin of the profitable application of capital and labor 
is that to which the price of the whole produce tends, under the con- 
trol of the general conditions of demand and supply.^ 

^' Of course, in the broader sense of the word, all •alternatives of 
recreation or of rest or of avoidance of pain could be ranged under the 
opportunity-cost concept. 

^Marshall, op. cit., p. 488 (5th ed., p. 452). 

^ Ibid. J p, 479 (5th ed., p. 428). 



392 VALUE AND DISTRIBUTION 

Put in other words the argument seems to run as 
follows: Price is used to explain rent; therefore, if price 
is the result of cost, only that cost in which rent does not 
figure can be used to explain price. And so it should, then, 
follow, one infers, that if the selling-price of products 
explains wages, wages cannot be used as costs to explain 
price. And all this would be true if land differentials or 
labor remunerations were worked out from the isolated or 
collectivist point of view, instead of being a competitive 
adjustment of the value of the instrument or agent; but to 
the individual the rent is a datum, a fixed, opaque fact of 
cost, and is not a thing which he determines according to the 
price; and precisely the same reasoning holds with regard 
to his wage or hire or time-discount outlays ; what is, for 
market purposes, for aggregate movements, a fact of dis- 
tribution, a value derivative and imputation, is to him a 
fact of cost. His acts are results from the value situation 
which he faces and out of which as opportunity he derives 
his remunerations. That he and his costs and his decisions 
and his derivative productive activities are in turn and in 
their small degree reacting causes, he does not commonly 
appreciate or need to appreciate. 

So far we have treated agricultural produce as a single com- 
modity But now we have to reckon for the competition 

between the different kinds of agricultural produce for the use of 
fertile soils Each crop strives against others for the posses- 
sion of the land; if any one crop shows signs of being more 
remunerative than before, relatively to others, the cultivators will 
devote more of their land and resources to it Thus in equilib- 
rium, oats and hops and every other crop will yield the same net 
return to that outlay of capital and labor which the cultivator is 
only just induced to apply. That "marginal" application which only 
just pays its expenses, and which therefore contributes nothing to 
rent, will yield equal net returns to the cultivator. For otherwise 
.... it would still be open to him to increase his gains by redis- 
tributing his crops The margin of cultivation has now to be 

described as the margin of the profitable application of capital and 
labor to all land which the competition of other crops yields to 
oats.=' 

This discussion therefore abandons cost at all but the 
intensive margin; there is, in this sort of cases, no extensive 
^Marshall, op. cit., pp. 480, 481 (5th ed., pp. 434, 435). 



ATTEMPT AT RECONCILIATION 393 

margin; the most unfavorable conditions of fertility chosen 
for oats are, it is rightly argued, somewhat affected by the 
fact that, for the land that is capable of growing oats, 

there is so great a demand for other purposes that it affords a 
higher rent, when used for them, than when used for growing oats ; 
.... land which would yield a good rent under them, but which 
yields a better rent under other crops. It is still true that rent is 
not an element in those expenses of production of marginal oats, 

to which the price of the whole conforms Jevons asks 

(Preface to Theory of Political Economy, p. liv), "If land which 
has been yielding £2 per acre rent, as pasture, be ploughed up and 
used for raising wheat, must not the £2 per acre be debited against 
the expenses of production of wheat?" The answer is in the nega- 
tive. For there is no connection between this particular sum of £2 
and the expenses of production of that wheat which only just pays 

its way When land capable of being used for raising one 

commodity is used for producing another, the price of the first is 
raised by the consequent limitation of its field of production,^ 

but not, Marshall rightly insists, by the rent payment, — that 
is, not in the sense of ultimate cause. The cost price, 
Marshall argues, is the cost at the intensive margin, and 
this margin is at a poorer level of land because of the use 
of the land for other things. And in any event, it is rightly 
urged, the rent, if it figures as cost at all, must figure not 
by what would have been paid if less had been paid, but 
by the actual amount that is paid. 

It must be admitted that to show that rent enters into 
the individual's computation of cost is not to prove that it 
enters into the cost of the marginal product; and it is pre- 
cisely here that Marshall takes his stand in the denial that 
rent is a part of cost-determining price. But by the same 
argument it can be shown that no cost enters into price- 
determining costs : "The amount of every item but one 
can be increased, and another unit of product be procured 
without any addition to the cost of that one item" (Fetter). 
And, really, it is not true that the item of product raised on 
rent-paying land is farther away from the margin of indi- 
vidual production, costs less, than the item produced upon 
non-rent-paying land ; nor is it true that the item upon the 
intensive margin costs more than the item requiring less 

^Marshall, op. cit., pp. 482, 483 (5th ed., p. 437). 



394 VALUE AND DISTRIBUTION 

expense for capital goods and for labor. And it is not true 
that marginal cost controls or determines market value, or 
that the marginal item has any other or greater effect upon 
value than any other item. Price is fixed at mar- 
ginal cost and not by marginal cost ; it is the whole demand 
and the whole supply which equate at price ; and in any 
case, the margin is always a personal margin, and not an 
instrument margin, — or only derivatively. In the competi- 
tive reckoning, the quantum of necessary remuneration for 
the entrepreneur's displacements and. sacrifices is irrelevant 
to the question of whether the land is marginal or not; 
these costs are as likely to be upon supra-marginal as upon 
marginal land, and away from the intensive margin as 
upon it. It does not matter, that is, whether the land is 
good at high rent or poor at correspondingly low rent ; and 
this again is equally true of capital goods or of labor. 
Nor, as a matter of individual cost — and here Marshall is 
clearly right — is it at all essential that the land have an 
alternative utility; it has, at all events, a value to other 
producers ; the owner could rent it or sell it ; the tenant's 
outlay for it is for him a displacement of other production, 
or, at least, of consumption; in some sense, narrower or 
broader, it is then an opportunity cost. 

But two or three pages farther on we find the follow- 
ing: 

This argument does not imply that a manufacturer when making 
up the profit-and-loss account of his business would not count his 

rent among his expenses For he may think that the saving 

in ground rent that he will make by moving into the country, to- 
gether with other advantages of the change will more than counter- 
balance its disadvantages. In a discussion as to whether it was 
worth while to do so, the ground rent of his factory would be 

reckoned among the expenses of his cloth It is no less true 

that in making up the profit-and-loss account of the cultivation of 
land, the farmer's rent must be reckoned as among his expenses. A 
hop-grower, for instance, may find that on account of the high rent 
that he pays for his land, the price of his hops will not cover the 
expenses of their production where he is, and he may abandon hop- 
growing, or seek other land for it. [And the land may then go to 
a market-gardener, who in turn hard-pressed by his rents] in his 
turn makes room for, say, a building company (Marshall, op. cit., 
pp. 486, 487) (sth ed., p. 450). 

It is thus difficult to make out what is meant by saying 



ATTEMPT AT RECONCILIATION 395 

that, in its effect to make the producer marginal, rent is not 
as much an influence as any other cost. True, it is 
really the superior pull of market-gardening which takes 
the land from hops and diminishes the supply of hops ; 
but precisely parallel is the case with labor or with capital 
goods ; this pull gets expression through the competitive 
fixation of costs. The advantages of market-gardening 
outrank those of hop-culture ; the rent is competitively fixed 
at a level to which the cultivation of hops cannot adjust 
itself. 

QUASI-RENTS AND COSTS 

Marshall's doctrine of quasi-rents, as indicating the 
returns upon capital instruments, while important and even 
epoch-making in the development of economic theory, is 
especially disastrous to the other portions of his theoretical 
structure. As we have seen, the doctrine is, in substance, 
that, for short-time purposes, capital goods receive an 
income of the same sort as that of land, — ^not as a cost, a 
price-determining fact, but as price-determined. 

Obviously, this is a view of cost, perhaps not precisely 
collectivist in standpoint, but at all events regarding cost 
from some other point of view than that of the entre- 
preneur-producer of the finished commodity. Like Cairnes, 
who approached cost, not in the conviction that "the easiest 
as well as the most practical course is to go straight to pro- 
duction for sale in a market," but in the conviction that not 
what the employer pays for the labor, but the laborer's 
own discomfort in grief and groan, is the sense in which 
cost has to do with value, Marshall now goes over for his 
cost computation to the point of view of the producer of 
the capital rather than that of the borrowing entrepreneur. 
That is to say, Marshall holds that, as a long-time doctrine, 
improvements upon land and capital goods conform in 
their value to the law of costs ; the making of them depends 
upon the prospect of the compensation to be had; in the 
long run, therefore, the cost value of the instrument must 
stand as a price-determining cost in its relation to the 
derived consumption good; but for short periods the capi- 



396 VALUE AND DISTRIBUTION 

tal good receives compensation parallel to that of land and 
is price-determined. 

Perhaps one might object that it is the very gist of the 
long-time doctrine that the compensation even then is price- 
determined; but the long-time adjustment clearly gives time 
for cost influences to make themselves effective in the 
supply of instruments. The real difficulty is, however, that 
Marshall has changed his point of view; he is now discuss- 
ing the ultimate determinants of the costs, rather than the 
costs as they present themselves to the entrepreneur; for 
it is true, as Marshall himself says, that the entrepreneur 
cares little for real costs ; his point of view has no concern, 
as a cost computation, with the deeper and more far-reach- 
ing questions of the processes and influences through which 
the costs have com.e to be as they are, — the underlying and 
directive situation facts and the past adjustments within 
this general situation. For the entrepreneur, whatever he 
has to pay for a productive fact is the cost of it. 

But even admitting the validity of Marshall's reasoning, 
— and for certain purposes, not entrepreneur purposes, its 
validity is beyond question, — we have again to ask whether 
wages are not paid upon precisely the same basis, and are 
not therefore, in the short-time view, equalh^ quasi-rents, 
and equally to be excluded from value determination. And, 
in view of the possibility of wearing out almost any sort of 
land, the possibility also, with sufficient applications of capi- 
tal, of producing almost any sort of land, and the necessity 
of constant capital applications in the way of land upkeep, 
does not this cost doctrine apply, in the long-time view, 
equally to land? 

But no one more strongly than the ultra-modem oppo- 
nent of classical doctrine would insist upon this quasi-rent 
principle. It applies to all agents ; the seeming of price 
determination by the hire of the productive fact is merely 
an aspect of the entrepreneur process. And so it is true, 
as Marshall points out, that, irrespective of past costs, there 
may be machines barely worth using and thereby giving no 
surplus of any sort, and that the value of other appliances 
is in the nature of a differential measured from this value- 
less-capital margin.-^ But it is equally clear that there is, 
in this sense, for labor a wage differential measured from 

^ Marshall, op. cit., p. 494. 



ATTEMPT AT RECONCILIATION 397 

idleness or from total inefficiency, and that all remunera- 
tions are the expression of a market value in the agent just 
that much greater than nothing.-^ 

So, at all events from the point of view of the indi- 
vidual, Marshall seems to admit that there is no better 
reason for excluding rent than interest from cost. But 
"from the point of view of society," he sees a difference. 
"Land is a fixed stock for all time," ^° while capital is within 
control and is elastic. But while this is true in a loose way, 
— that is, it is true that the land supply has not the same de- 
gree of elasticity as most other capital goods, — this has no 
significance for the cost doctrine of any particular situa- 
tion, for the analysis of the value adjustnent taken for a 
cross-section of society, though it may point to changes 
later to take place in some of the elements of costs, and so 
may foretell important modifications of the terms under 
which at a later time the value problem will have to be 
worked out. 

And so, while Marshall admits that "the hire of a pony 
is the excess of its value over the hire of a pony which is 
so weak as to have no hiring-value at all ; the hire of 
ponies, like that of land, is governed by the value of the 
services they will render," ^^ he regards this as only for the 
time; in the long run, the value of the ponies will be modi- 
fied as cost influences make themselves felt through the 
changing supply of ponies. Ponies as a rule will yield no 
surplus above normal profits ; not so with land. 

But note that Marshall's position is, after all, that it is 
not so much so with land ; for he says at the bottom of the 

^ "The earnings of every kind of capital goods can be brought 
into the form of surpluses, or differential quantities The posi- 
tive power of each bit of land to create wealth fixes the rent of it, just 
as the positive power of each unit of capital to create wealth fixes 
the value of it. The lowest grade of every instrument produces nothing, 
and is a no-rent article. Higher grades of every instrument, land 
included, produce something ; and if there is any advantage in calculat- 
ing the amount of that something by saying that it is a product of the 
good instrument minus the product of the poorest one, that calculation 
will always yield a correct result, since the product of the poorest one 

is nothing All wages are rents of labor " (Clark, 

The Distribution of Wealth, p. 346.) 

^Marshall, op. cit., p. 493 (5th ed., p. 431). 

'^ Ibid., p. 494. 



398 VALUE AND DISTRIBUTION 

same page : "The supply of fertile land cannot be adapted 
quickly to the demand for it, and therefore the income 
derived from it may diverge permanently much from the 
normal profits on the cost of preparing it for cultivation ;" 
which leaves the distinction between interest and rent in 
their relation to cost one of degree only, and not of funda- 
mental significance, and leaves labor and wages to be 
assimilated, for cost purposes, rather to land and rent than 
to capital and interest. 

But nevertheless there are differences to be taken into 
account between long and short periods with regard to the 
adaptability of supplies of agents through the mechanism of 
costs. But, however and whenever the entrepreneur hires 
his appliances, the rent paid by him is the market value of 
the agent's service; and dear or cheap, his payments are 
costs to him. And thus, what Marshall formulates as true 
only of the long run, is really true for every case: "The 
income that is derived from capital in this form [specialized 
capital goods] enters into the payments by which the 
expenses of production of the commodity in question have 
to be covered." ^^ 

And Marshall asserts that, in a stationary state of 
society, the income of any appliance, being correctly antici- 
pated beforehand, would accurately correspond to its cost, 
and thus 

the aggregate expenses of prodviction might then be found either 
by multiplying these marginal expenses by the number of units of 
the commodity; or by adding together all the actual expenses of 
production of its several parts, and adding in all the rents earned 
by differential advantages for production.^^ 

Notwithstanding that this is a statical analysis, it never- 
theless seems to abandon all that has gone before. 

The difficulty suggested a page or two back, that, 
according to Marshall's reasoning, wages should be 
regarded as in the nature of a rent or of a quasi-rent, and 
as such should be dropped from his cost computation, or at 
all events from the short-time form of it, requires some 
further consideration. 

^^ Marshall, op. cit., p. 495. 

^ Ibid., p. 520 (sth ed., p. 810). 



ATTEMPT AT RECONCILIATION 399 

In Book VI, chap, v, Marshall discusses the "so-called 
rent of labor," and regards this as "the question under 
what head to class those extra incomes which are earned by 
extraordinary abilities." Whether or not he is justified in 
his assertion that "this analogy is valid and useful so long 
as we are merely analyzing the component parts of the 
income earned by an individual," it is for his purposes 
safe to say that "we are not at liberty to treat the excep- 
tionally high earnings of successful men as rent, without 
making allowance for the low earnings of those who fail ;" 
for it must be remarked that he is discussing the influences 
which restrict or recruit the labor supply for any particular 
line of activity: "for the supply of labor in any occupation 
is governed, other things being equal, by the earnings of 
which it holds out the prospect." With these remunera- 
tions in view, the youth and his parents, in selecting his 
occupation, "are very far from leaving out of account 
the fortunes of successful men. These fortunes are there- 
fore part of the price that is paid in the long run for 
the supply of labor and ability that seeks the occupation; 
they enter into the true or 'long-period' normal supply 
price of labor in it." But in the short run, these extra 
incomes are rents — "do not enter directly into the marginal 
expenses of production of the goods, nor therefore into 
their price; they are governed by that price, and there- 
fore are rather to be regarded as a quasi-rent. But the 
same is true of the special net return of acquired skill." 
Doubtless wages are a rent in the sense of an efficiency 
remuneration; but in this sense, there is no justification for 
taking anything but absolute inefficiency as a margin. In 
Marshall's view, however, of the return upon acquired 
skill, the idea is one of the investment of capital, the effi- 
ciency out of which the rent arises being regarded as an 
addition to the native endowment. But Marshall elsewhere 
points out that 

when an artisan or a professional man has exceptional natural 
abilities, which are not made by human eflfort, and are not the result 
of sacrifices undergone for a future gain, they enable him to obtain 



400 VALUE AND DISTRIBUTION 

a surplus income over what ordinary persons could expect from 
similar exertions following on similar investments of capital and 
labor in their education and start in life; a surplus which is of the 
nature of a rent.'* 

But notice that now the idea is of a margin measured 
somehow from the basis of ordinary persons, while before 
it was a differential by addition to original power. But 
why should not remuneration for any ability possessed 
without cost be regarded as, in its entirety, a rent? And 
what have ordinary people to do with the case? And 
ordinary in what grade of people or line of occupation? 
Walker, we recall, in his doctrine of entrepreneur rent, 
found his marginal man in the same line of production, 
though one does not readily see why, or why not, and denied 
that the differential profits, so measured, made any part of 
price-determining cost: "So his doctrine would appear to 
mean only that that part of the employer's income which is 
due to exceptional abilities or good fortune does not enter 
into price ;" ^^ in all of which Marshall appears to concur, 
excepting with the reservation that cost must include the 
blanks if it includes the prizes : "The argument, in so far 
as it is valid, applies to the 'rare ability' of the earnings 
of all kinds of labor as much as of earnings of manage- 
ment." 2° 



'* Marshall, op. cit., p. 704 (sth ed., p. 621). 

^ Ibid., p. 705, n. (sth ed., p. 625, n.). 

^ Ibid., p. 705, n. (5th ed., p. 624, n.). 

Macfarlane {Value and Distribution) accepts the notion of quasi- 
rents in wages, regards these quasi-rents as price-determined, and 
interprets them not as differentials of advantage in favor of the 
chosen employment as against the next best alternative, but as a differ- 
ential in favor of one employment as against another (p. 311). But 
merely as higher remuneration for higher efficiency there is no room 
for a distinction as far as costs are concerned. And as Macfarlane's 
acceptance of Walker's notion of entrepreneur differentials is unfor- 
tunate, so likewise must be regretted, not the unwillingness to accept 
the term profit as applying to this differential, but the reason for this 
unwillingness, viz., that Walker's terminology breaks with the alleged 
tradition that profit, in whatever variety of meanings, is constant in one 
characteristic, that is ajlways a part of cost (p. 135). But surely there 
is no complete consensus of opinion here ; for example. Mill some- 
times, and Hadley always, are to the other effect ; and, as we have seen, 
the truth appears to be that profit distributes into cost and non-cost 
elements, into necessary and unnecessary profit. 



ATTEMPT AT RECONCILIATION 401 

But aside from the fact that Marshall's doctrine is with- 
in the field, not of entrepreneur costs, but of 
the conditions underlying and determining these costs, 
it is to be said that the whole argument miscon- 
ceives the nature of marginality in choice of occupa- 
tions. A man making $5,000 a year may as well be mar- 
ginal as one making barely what he could command as 
wage-earner.^^ 

^' Quasi-rents and costs. — In view of the principle that 
all competing producers, no nratter what productive agents they may 
hire, must pay for the services obtained the market value of these 
services, it is difficult at first thought to see even a remote justification 
for the notion that rent does not enter into the determination of price. 
If there is any distinction possible here between land on the one side 
and labor and capital on the other, it must be that the labor or the 
capital will go, not merely to another producer, if it is not paid a 
satisfactory rate by the producer in question, but will go into another 
industry if not paid an adequate rate in this one. But this holds 
equally with lands ; most land is less specialized than most capital 
goods and than most forms of skilled labor. From the displacement 
point of view, therefore, whether in the competitive or the coUectivist 
computation, land is as rightly a basis of cost as is capital or labor. 

But in the degree that any agent, whether land, labor, or capital, 
is specialized in its adaptations, there remains something to be said for 
the rent-cost doctrine from the point of view of a collectiyist society. 
And even in a competitive economy, may it not be true that, viewed 
in the large as a question of society in the aggregate, such part of the 
compensation of any productive agent as is more than that agent could 
earn elsewhere, such part as is purely an employment or occupation 
diflferential, is a price-determined and not a price-determining charge? 
But it is well to see that if such is the truth, the doctrine goes dis- 
turbingly far. For almost all productive agents are specialized in some 
degree ; there is in most cases a differential in favor of the current and 
actual employment ; the alternative use represents, as a value displace- 
ment, an appreciably smaller sum of value. Put in other terms, most 
incomes, regarded from the point of view of the income-receivers, are 
greater as incomes than as costs. These quasi-rent quantities attach 
with many forms of intermediate goods, with most machinery, and with 
by far the larger share of labor agents. The doctrine holds true not of 
land alone, but, to an even greater degree, of much capital, much labor, 
and of almost all professional activities, and of all or nearly all 
managerial ability. 

It is, indeed, fairly clear that if in costs we abandon the point of 
view of him who pays the costs, and go over to the question of cost 
from the point of view of the recipient of the remuneration, the income- 
collector, and attempt to distribute these incomes into cost and non- 
cost categories, we shall have, for competitive purposes, a worthless 
computation applied to the solution of an unsolvable problem. 

But in point of fact, the distinction between value-determined and 
value-determining distributive shares is as worthless as it is unwork- 



402 VALUE AND DISTRIBUTION 

Marshall's discussion of land rent as income requires 
no very protracted consideration. It must, however, always 
be a source of error, though not necessarily of very serious 
error, to assume as basis of the discussion that the tenant 
farmer is a man of normal — whatever that may mean — 
ability and enterprise for that particular class of tenancy; 
and that if he rises above that standard, he will himself 
reap the benefit; "if he falls below it, he will bear the loss." 
So far as there is truth in this, it is self-evident, — which is 
no objection to it; but surely the normal man has no signifi- 
cance in this connection, since normal men do not make 
the price offers against which the successful tenant has to. 
bid in his competition to rent the productive agent. 

Out of the income derived from the land, the landlord, 
it is said, obtains a share, 

governed, for all periods of moderate length, mainly by the market 
for the produce, .... and it is therefore of the nature of a rent. 
And that part which the tenant retains, is to be regarded, even for 
short periods, as profits entering directly into the normal price of 

able. In the broader view, all agents are value-determined in their 
remunerations, that is, the value of each is the result of the total situa- 
tion in which each as cause has exercised only an infinitesimal, or at 
least an unimportant part. But none the less each is in its minor 
share a cause ; each item of supply or of demand, precisely because it 
is a part of the total supply or of the total demand, has its effect upon 
the price ; no marginal item, either of demand or of supply, has more 
to do with the price than to change the price, to the extent of one item 
of result, from what the price would otherwise have been. Is it true 
that the last straw breaks the camel's. back? or, if with nine boys upon 
a raft it barely floats, is there profit in inquiring whether, when a 
tenth boy jumps on, he sinks the others or is rather sunk by them? 
or whether in the clash of contending armies, any soldier is sweeping 
forward or is being swept ? or in attempting to decide whether, when 
the scales are finally tipped, the marginal increment of goods is motion- 
determining or is motion-determined ? True it is that the rent of 
land or the wage of labor i^ a derivative from the value situation, — is 
price-determined in this sense ; but equally true is it that the supplies 
are larger and the prices lower because of the productiveness of this 
land, or of the effectiveness of this labor ; and in no other sense than 
this is any agent or instrument price-determining. 

There is nothing for the case but to keep in mind that all these 
incomes for hired agents are, from the hiring point of view, costs, since 
they express the market price, competitively established, of the efficiency 
service in value creation. All remunerations are price-determined, and 
all agents are price-determining, but as process, all this is worked out 
through entrepreneur methods and adjustments. There is ultimately 
no marginality anywhere in economic affairs, excepting with the mar- 



ATTEMPT AT RECONCILIATION 403 

the produce ; because the produce would not be raised unless it were 
expected to yield those profits.''^ 

Stopping merely to query whether the share retained 
by the tenant can accurately be spoken of as a part of the 
income "derived from the land," it remains to object that 
not all of the tenant's profit need be expected in order to 
induce the production, that is, not all the profit is cost. 
Some portion of this profit is commonly a personal differ- 
ential, partly by virtue of peculiar adaptation to the land — 
renter's quasi-rent — partly a peculiar adaptation to the crop 
as against any other crop, partly a peculiar adaptation to 
agriculture as against any other line of occupation, — unless 
of course, the talk is of a marginal entrepreneur, which 
case, however, cannot be in Marshall's thought, since mar- 
ginal production, in his scheme of things, takes place only 
on marginal land. 

In summing up, it is to be said that Marshall's analysis 
of demand and of marginal utility is a great advance over 

ginal entrepreneur, or with such agents as, through their relation to the 
entrepreneur and to his plans and circumstances, arrive in that relation 
at this position of marginship. And to conceive of agents of production 
in their relation to the plans and circumstances of the entrepreneur is 
to conceive of them as members of a productive group or complex, and 
as commanding their rent or their value by virtue of their importance 
as marginal items in making up this group complex. 

But there is no reason to suppose that all agents of any productive 
sort may not command a quasi-rent of occupation or of employment. 
When an agent is marginal, it is so merely in the sense that its relation 
to the entrepreneur is such that he is on the point, if the price falls, 
of rearranging his production group and of dispensing with the services 
of this agent as used; but it does not follow, and, for the purposes in 
hand it does not matter, that the agent, if relinquished, may, under 
another entrepreneur, remain in the same line of activity, or may 
become in some other line of activity a producing agent, or may go out 
of use entirely. In any case some or all of the powers of the agent 
will cease to be utilized if price falls ; it is sufficient that through it 
some elasticity of supply obtains. 

And just at this point it is worth while to repeat that the value 
margin of rentlessness and the margin of utilization do not of necessity, 
or even commonly, coincide. That an item of land or of machinery is 
rentless and valueless in the market does not imply that in the hands of 
its particular employing entrepreneur it is on the point of abandon- 
ment ; there are possible quasi-rents of adaptation here. 

And it may be remarked that for purposes of tax theory, and 
especially in the field of shifting and incidence, these quasi-rent quanti- 
ties are of very great significance. 

^* Marshall, op. cit., p. 716 (5th ed., p. 636). 



404 VALUE AND DISTRIBUTION 

that of the Austrians, and leaves httle or nothing to be 
desired; but that his account of cost of production fails 
precisely because he does not apply here a parallel analysis 
of margins, that is, does not conceive of marginal cost as a 
ratio-relation in which secondary and competing demands 
are now of paramount and now of exclusive importance. 
That his emphasis is upon cost rather than upon utility is 
due to the fact that he has failed, as have the Austrians, 
to perceive that of utility and sacrifice, demand and cost, 
each is as truly as the other mainly an expression of ratios 
of marginal utility based upon opposing demands. 

That Marshall's analysis of the relations between rent 
and cost is so unsatisfactory is due to the fact that he has 
not appreciated that cost as bearing upon supply is not a 
collectivist phenomenon, but is strictly an entrepreneur 
computation, and as such is exclusively within the sphere of 
the individual psychology, and that what, from one point 
of view, is not cost but income, a value-determined share, 
cannot be carried over to the other point of view without 
changing its significance and appearing as cost; and finally 
that with cost, as an individual reckoning, a producer may 
as readily be marginal upon non-marginal land as upon 
marginal land, or may as readily be non-marginal with 
marginal agents as with non-marginal. 



CHAPTER XXI 
THE ATTEMPT AT RECONSTRUCTION: HOBSON 

In the main, Boehm-Bawerk's scheme of market analy- 
sis is followed by Hobson, to the extent of showing that 
rigid outside limits are fixed for prices : "But to fix limits 
for a price is not to fix a price and curiously enough 
Boehm-Bawerk leaves his analysis at this interesting point." 
Competition does not settle it; it is left to bargaining, and 
Heaven knows how it would settle if each bargainer knew 
his opponent's subjective valuations: "Why should either 
party give way? There is no economic method of reach- 
ing a price point here," though there might be a toss-up or 
a splitting of the difference. "Competition stakes out a 
ring within which bargainers fight it out by force and 
craft." 1 

On page 17 Hobson gives the first intimation of a view 
later prolific of much bad reasoning, namely, that "the 
effectual buyers and sellers whose subjective price limits lie 
above and below the limits within which a price point is 
fixed, and who, therefore, take part in the bidding of the 
market, have no direct influence upon the price." But the 
marginal pair — ^not pairs, Hobson rightly insists — are "those 
members of the market whose subjective valuation fixes the 
possible limits^ etc." 

The difficulty is, of course, with the word "fixes," and 
with the implication that the non-marginal traders have 
little or nothing to do with the case, which implication 
later appears to be Hobson's real position.^ 

^ John A. Hobson, The Economics of Distribution, Macmillan, 1900, 
p. 16. 

^ This doctrine that there is an inter-marginal area of "forced 
gains," where competition does not rule, is also emphasized by Mac- 
farlane {Value and Distribution, chap, v), and is correct for whatever it 
is worth ; no Austrian would question farther than upon this issue of 
worth. It is true that the Austrian discussion of value, as an account 

405 



4o6 VALUE AND DISTRIBUTION 

The long-time or normal price, as Hobson rightly urges, 
can give no assurance that the total gains of trade will 
divide equally between buyers and sellers. If the thing 
went by chance, it might be otherwise, but not so if the 
superiority in bargaining belongs permanently to one side. 
There is no reason for thinking that the long-time price 

of the logic implicit in the market process rather. than as an accurate 
description of the objective fact, assumes that, as the items of offer 
and demand become more numerous, this margin interval of higgling is 
constantly narrowed. A sufficiently minute gradation of both offer and 
demand is taken for granted — so near an approach to infinitesimals — as 
to justify the treatment of the selling-price as accurately a marginal 
price for both demand and supply. Admitting all the necessarily 
assumed conditions to be actual, viz., that all the commodities are of 
equal desirability, all the competitors in the market simultaneously, 
and "that the buyers and sellers make no mistakes about the actual 
state of the market such as would prevent them from really pressing 
their egoistic interests" (Positive Theory, p. 204) ; assuming, in short, 
a perfectly frictionless market, all this may be accepted, as a purely 
theoretical and logical account of the case ; but it is, of course, quite 
another and a quite more dubious matter to assert that the point of 
adjustment expresses marginal utilities, or measures them, or is 
measured by them, and especially that it is £xed by them, 

Hobson and Macfarlane place especial emphasis upon this inter- 
marginal area as a matter of very considerable practical as well as 
theoretical importance. And it is true that in many cases there is 
appreciable room for sheer bargaining skill and bargaining guile, and 
for oppressive use of this advantage ; for really, no two horses are 
precisely alike, and "an actual horse market .... would not in fact 
result in the attainment of an exact market price for a given quality of 
horse." Nor is the gain of the purchaser dependent solely upon the 
discrepancy between his direct subjective valuation and that of the 
market — upon his mere consumer's rent. He is buying to sell again, 
and "A can only value the same goods at 20 per cent, more than B 
because he enjoys some trading or manufacturing advantage (objective) 
which enables him to put what he has bought to a larger productive 
use" (Hobson, op. cit., p. 24). Again, as to the seller of horses, the 
supply is not infinitely divisible ; "there are distinct and fairly wide inter- 
vals of valuation between the several units" : but the purchasing 
medium is indefinitely divisible, which facts impair "the practical 
service of the whole mathematical treatment," unless with goods like 
corn or cotton. With these last, there is "a far closer and more effect- 
ive competition between buyers on the one hand and sellers on the 
other, the result being that the limits between which ordinary competi- 
tion breaks down are much narrower" (p. 37). And, more important 
yet, many markets are local or partly isolated in character, rather than 
in close touch with the world-market, as, for example, with highly 
perishable and with cheap and bulky articles ; in such cases competition 
breaks down early. And there are rings and speculators ; farmers. 



ATTEMPT AT RECONSTRUCTION 407 

will be a fair competitive price in the sense of excluding 
bargaining for gain : "Average the dealings of small 
money-lenders with their clients over a term of years; you 
obtain a normal price of such loans, but that price reflects 
a normal advantage possessed by such money-lenders," ^ 

For problems of price change, Hobson's way of con- 
ceiving demand and supply is helpful, — supply, the rate of 
increase of stock, — demand, the rate of withdrawal, both 
flows rather than funds, with prices rising or falling as one 
flow exceeds the other. For any particular commodity the 
demand flow is best expressed as money. Value is thus no 
inherent quality, whether as regarded by one school as 
expressive of cost or by the other school as expressive of 

miners, and fishermen sell to middlemen under conditions of feeble or 
non-existent competition, and are more or less at the mercy of shippers, 
importers, and wholesalers, or of patents, secret processes, and combina- 
tions : "These and similar causes render the conditions of free and 
fluid competition inoperative over a vast majority of the processes in 
the sale of goods" (p. 32). So with the renting of land or the borrow- 
ing of capital, with the wage contract, the contracts of author with 
publisher, of mistress with servant, of hotel-keeper with guest. 

Again, the buyer is the holder of money as against the seller of a 
specialized commodity : "the urgency of a trade use is less than the 
urgency of a personal need." True, the buyer for personal consumption 
is often in the reverse case, having to buy now from someone who is 
not obliged to sell now : "so .... venders of refreshments or books 
in a railway station enjoy a distinct advantage in bargaining." But 
ordinarily "the uncertainty of finding a purchaser at a calculable 
price .... must be accounted the weakness of the seller as com- 
pared with the buyer" (p. 37). And "the scale upon which the large 
business is conducted enables it to employ skilled specialists in buying 
and in selling" (p. 39). 

It is worthy of note that Hobson carries his idea much farther than 
Macfarlane in pointing out that the volume of commodities not suscep- 
tible of marginal valuation by stocks is not a minor quantity in actual 
business but is possibly even much the more important quantity. And 
it is doubtless important, not merely from a practical but from a 
theoretical point of view, that all this be recognized. But the failure 
of competition in the fixation of prices, while of vast importance prac- 
tically and greatly in danger of overlooking, does not appear to have 
large theoretical significance ; Hobson's criticism points to the necessary 
allowances to be made, for practical purposes, where, as is the usual 
case, actual market conditions, instead of being fully competitive, are 
complicated in some measure by monopoly influences. 

^Ibid., p. 57. 



4o8 , VALUE AND DISTRIBUTION 

utility; the one theory, as Hobson interprets it, denies the 
bearing of all influences not acting through cost of produc- 
tion ; the second theory admits influences from the cost side 
only so far as they serve to operate upon utility. One 
theory looks at costs as giving value; the other, regarding 
the problem from the standpoint of consumption, takes 

the consumer's test of the valuable — utility — to refer it back as a 
property potentially existing in different classes of goods which are 
on their way to blossom into really useful goods when they reach 

the consumer Stand at one end of the stream of industry, 

you see goods gathering cost as they pass from process to process 
in production, and then cost appears to be the value which is grow- 
ing; stand at the other end, value seems only to emerge from the 
contributions which productive processes make toward the supply of 
consumables All holders of a "cost" theory admit that valu- 
able things must be useful, but this utility is only a condition; 
"utility" men allow that cost affects the value of all freely produced 
goods, but they maintain cost is the condition, utility is the efficient 

cause It is difficult to comprehend why a change in the 

value of a stock of wheat, due to a favorable season or a new 
railway, should be attributed to demand, which has either not 
changed, or the change of which has been clearly consequent upon 
an enlargement of supply. If scarcity changes value by changing the 
marginal utility, why is not the cost factor a determinant of utility? 
In fact, value is affected "by changes proceeding from either side, 
and this distinction between causes and conditions of value has no 
ultimate validity." It will not do for the manufacturer to assume 
that goods will sell high solely because they are costly to make; and 
when "Mr. Beecham sells us pills which he perhaps correctly observes 
are 'worth a guinea a box' to us and yet, with a rare spirit of self- 
denial, consents to take i .y. lo d. he is regulating the price rather by 
the consideration of the cost to him than the utility conferred 
upon us."* 

It is doubtless true that 

from utility through demand proceed the very forces that direct and 

evoke costs But though utility thus figures as the final cause 

of value, it is not rightly taken as the sole efficient cause or as the 
sole determinant of quantity of value attaching to a stock of 
goods," 

* Hobson, op. cit., pp. 66-71. 
" Ibid., p. 75. 



ATTEMPT AT RECONSTRUCTION 409 

for the problem of the vohime of the supply is still there. 
And cost is perhaps the more convenient business way of 
arriving at values, since every change in demand forces 
will express itself as a change in the costs against which 
the demand is equated, just as changes in cost will express 
themselves in utility. And Hobson insists that Dietzel, in 
his controversy with Boehm-Bawerk, was wrong in admit- 
ting that goods limited in supply get their value from their 
utility. Dietzel should have stood for scarcity also, it 
being true that only as explanation for scarcity has cost 
any significance. And so Marshall, in suggesting that, for 
short periods, our attention is best fixed upon demand, and 
for long periods upon supply, would be wrong if he had 
intended to imply that cost is in ultimate analysis more 
important than utility as a regulator of value; and in fact 
it is not clear that more or more enduring forces affect 
value from the production side than from the consumption 
side. 

Thus far in all of this there is remarkably little that is 
not admirable, with the exception of the "fixation by mar- 
gins ;" but in the latter portion of it, there is too little or no 
recognition that changes in the demand for other lines of 
goods, say an increased demand, must have the effect to 
decrease the supply of the particular line of goods under 
consideration. It is in fact by the demand for other goods, 
— through the resistance of other industries, — that limita- 
tion is worked upon the supply of productive goods and 
agents in any given industry. 

That Hobson does not here appreciate in its essentials 
this displacement or opportunity aspect of cost, — this resist- 
ing-demand aspect, is evident from his assertion that value 
in the individual economy may be treated as a case "of 
exchange worked out between the two sides of ourselves, 
the idle self, which shirks effort, the greedy self, which 
seeks satisfaction." *' This formulation would be inade- 
quate for any non-producing individual economy, say, the 
ordinary child or woman, or for him who finds pleasure in 
work and yet recurrently quits work because of the greater 
attractiveness of recreation. This last is truly a case of 

* Hobson, op. cit., p. 91, 



4IO VALUE AND DISTRIBUTION 

cost in the sense of a supply-limiting influence, but in this 
sense only. The reservation Indians, after the govern- 
ment distribution of supplies, get at a system of valuation, 
each for himself, and a derivative system of exchange 
relations for the group as a whole. 

Subjective cost and subjective utility are by Hobson dis- 
tinguished from objective cost and objective utility. 

Subjective cost must be taken to consist of the actual effort 
of workers measured in terms of disagreeable feeling and regarded 
as a quantity, i. e., disutility in work, as estimated by the individual 
consciousness of the worker. Objective cost must be taken to mean 
the productive energy which attaches to this effort, referred for 
measurement to some objective standard, i.e., hours, foot-tons, etc.'' 

Apparently, then, no two things could be farther apart 
than subjective and objective cost; the case is, indeed, not 
one of contrast or of opposition, positive and negative, but 
rather of entire incommensurability, incomparability, and 
irrelevancy. Note also the use of the plural, "the actual 
effort of workers, etc and regarded as a quan- 
tity." Is this a group notion of an absolute feeling magni- 
tude? 

Subjective cost appears to be the opposite of subjective 
utility, "the pleasurable feeling got out of consumption by 
the consumer," assuming, as perhaps we may — or may not 
■ — ^that the consumer and the producer are the same person. 
Objective utility, however, is not precisely the opposite of 
objective cost, the foot-tons of energy attaching to the 
effort of production; objective utility measures "the services 
of consumable goods by some objective standard, i. e., the 
power of sustaining life, or ... . the actual heating- 
power in a hundredweight of coal." ® 

[Now] while the subjective cost and utility which attach to the 
production and consumption of wealth are evidently the true meas- 
ure of economic prosperity .... the operations of the actual busi- 
ness world, as expressed by money valuations, have direct reference 
only to objective cost [foot-tons, etc.] and to objective utility 
[life-sustaining or body-heating power and the like]. 

^ Hobson, op. cit., p. 99. 
» Ibid. 



ATTEMPT AT RECONSTRUCTION 411 

But whatever this means, and whether or not it is true, 
no attempt is made to equate or to relate objective cost to 
subjective cost, to equate, that is to say, the expenditure of 
units of energy with the pain burden of this expenditure : 
"A given quantity of objective cost may be related to 
indefinitely divergent quantities of subjective cost;" workers 
are of all grades of strength and endurance. 

So also there is little or no correspondence between 
subjective utility and objective utility; consumers vary 
widely in capacity for enjoyment and in methods of enjoy- 
ment, and with changes in age, financial well-being, and 
health, each man is for the purpose a different man; "food 
will vary in subjective utility from infinity to zero, accord- 
ing as it passes into the possession of a starving person or 
a fully fed one." ^ 

Whether as criticism or as interpretation, it is at all 
events to be inferred from all this (i) that there is no 
market method of comparing, for market purposes, sub- 
jective costs with subjective utilities; (2) periods of time 
cannot, for market purposes, serve as measure of any sort 
of cost; (3) nor is there any machinery in the market for 
comparing goods according to life-sustaining power or 
pleasure-giving service, nor any machinery for comparing 
foot-tons of energy excepting in terms of price. 

And so, objective costs not being comparable as outlay 
so as to serve as explanation of value or of price, and being 
comparable by the entrepreneur only in terms of price ; and 
subjective costs not being comparable at all, since they 
are feelings of different persons; and objective costs 
not being reducible to subjective costs, or comparable 
with them, it only needs the following added: "A 
given quantity of objective utility will vary indefinitely 
when reduced to terms of subject utility." And yet 
somehow out of this, Hobson arrives at the notion 
that, 

■ Hobson, op. cit,, p, loi. 



412 



VALUE AND DISTRIBUTION 



referring to our theory of Value or Importance, the terms will take 
the following setting: 



Subjective 
Cost 



Objective 
Cost 



Measured in\ 
Measured in hours, foot- 
units of un- tons, or 



desirability 
of effort 



other meas- 
ures of out- 
put 



Importance 
or Value 



Objective 
Utility 

Measured in 
power of sus- 
taining vital 
energy, or 
furnishing 
mechanical 
force, i. e., 
nitrogenous 
units, or de- 
grees of tem- 
perature 



Subjective 
Utility 



Measured in 
units of de- 
sirability by 
consumers 



It may well be that this exposition falls far short of 
doing justice to the actual meaning and doctrine pre- 
sented by Hobson; for the present writer confesses him- 
self to have not the slightest idea of what it all means. In 
the first place, it is not clear whether the discussion is 
intended to restrict itself to the field of subjective value. 
The chapter is entitled "The Subjective Basis of Value," and 
opens with the following words: "In order to mark the 
essentially subjective nature of the theory of value, it is, 
etc." And it is to be noticed that, despite the fact that 
subjective value, in the established sense, or in any intelli- 
gible sense, is purely an individual category, this "setting" 
given to the "value and importance" problem presents the 
case as in part a matter of "units of desirability by con- 
sumers." And directly following upon this "setting" or 
formulation, the discussion runs fully in terms of market 
forces and adjustments : "The first portion that is sold 
goes to satisfy the strongest desires of consumers, the 

next portion a somewhat weaker desire, and so on 

Yet all portions have the same price and the same value." ^" 

It is at any rate clear that this manner of analysis is 
intended and believed by Hobson to avoid somehow the 
difficulty facing the utility school, "to explain how, with a 
diminishing utility attached to the successive portions sold, 
the value and price of the part which serves the fullest use 
are as great as that which supplies a necessary of life." ^^ 



'Hobson, op. cit., p. 102. 
Ibid. 



ATTEMPT AT RECONSTRUCTION 413 

The idea seems to be that value is a compound of 
diminishing utility and increasing cost, the two being held 
at equilibrium and equality by the fact that as the one 
increases the other diminishes, and vice versa : 

The first portion that is sold goes to satisfy the strongest desires 
of consumers, the next portion a somewhat weaker desire, and so on 
until the last portion that is sold satisfies the weakest desire, or, 
using the ordinary language, has the smallest utility attached to it. 

Yet all portions have the same price and the same value Our 

tabulation which makes value=importance, shows that the importance 
attaching to all portions of the supply that are sold is equal. For 
as the subjective utility furnished by consumption of the later 
units of supply diminishes, the subjective cost of producing these 
has increased. The first unit of consumption which satisfies the 
strongest-felt need is rightly considered as taking off that portion 
of supply which would be produced if no other were produced, be- 
cause it can be produced most easily. Each later portion .... 
satisfies a weaker need, but is produced at greater cost, and since 
cost plays the same direct part in assigning importance or value to 
an article as does utility, there is no diminution of value by a reduc- 
tion of utility accompanied by a corresponding rise of cost. The 
last portion of supply with the least subjective utility has the 
highest subjective cost.^ 

This seems to mean that by as much as you enjoy a 
thing more you may be sure that its producer was less 
grievously burdened to produce it; and thereby it appears 
that your valuation needs be low : And with the later por- 
tions of the supply, one's wearied marginal appetite is 
saved from positive aversion only by the knowledge that 
the laxly regarded item was produced at the maximum of 
pain to its producer. And so the drunkard at feast could 
derive not even a minor enjoyment from his latest cups 
were he so fuddled as to forget that "the last bottle .... 
which furnishes the smallest satisfaction to the drinker, is 
the bottle the production of which represents the last 
hour's labor of the hardest- worked producer, i. e., has the 
highest subjective cost attached to it." ^^ 

But if, in our bewilderment as to what this may possi- 
bly mean, we incline to query whether, after all, the talk 
may not be purely in the field of individual production for 

" Hobson, op. cit., p. 1 02. 
^^ Ibid., p. 103. 



414 VALUE AND DISTRIBUTION 

personal consumption, an analysis of strictly subjective 
phenomena, the context will serve to negative the possi- 
bility. And even were it so, it would be hard to believe 
that the isolated producer attributes any satisfaction in a 
series to any particular item of productive effort, and 
esteems all items in the pleasure series equally, under the 
computation that as much as the pleasure of consumption 
is more by so much the pain of production was less. 

LAND RENT AND RENT COST ^* 

As will later more fully appear, Hobson stands, with 
reference to the land-rent and the rent-cost problems, for 
the following five propositions : 

1. That there are land hires that do not enter into cost, 
and other land hires that do enter, that is, that there are 
price-determining and price-determined rents. 

2. That both land hires and product prices are deter- 
mined by a process of margin fixation. 

3. That the determinant margin is an instrument mar- 
gin rather than a personal margin ; this, however, not quite 
consistently. 

4. That the services of land, labor [and capital goods?] 
are reduced to a common denominator, that is, are funded 
in terms of productivity units. 

5. That the fundamental principle in the analysis, the 
guide-thread for the labyrinth, the key doctrine in the prob- 
lem, is the law of displacement cost, the alternative use of 
the productive agent, that which we have already analyzed 
as the opportunity-cost principle, applied, however, by 
Hobson, not in the competitive sense, but from the col- 
lectivist point of view and in the collectivist tenor. 

Ricardo's method of finding price-determining cost at 
the no-rent extensive margin of land, whereb}" all rent 
could be regarded as the result rather than the cause of 
price, Hobson declares to be erroneous as based upon "a 

" Hobson, Tlie Law of Rent as the Basis of Co-ordination of the 
Factors of Production, Part I. 



ATTEMPT AT RECONSTRUCTION 415 

fallacious simplicity in the abstract setting given by Ricardo 
to his problem" (p. 119). Of the Ricardian assumptions, 
(i) that wheat is the only agricultural product, and (2) 
that this product is raised upon extensive-marginal land, 
neither is correct. But, as Hobson declares, were the 
assumptions correct, the conclusions deduced by Ricardo 
would be irrefutable. 

"Neither of these assumptions is absolutely warrant- 
able ;" even were there no grazing use to absorb, as against 
wheat, the poorest grade of land, conditions might exist 
such that if "an increase in the population and the demand 
for wheat brings into cultivation all the land available, the 
worst land in use may or must bear an actual rent." This 
land rent, it is said, "will not be a differential rent, but a 

forced or scarcity rent Such forced rent would 

evidently be reckoned as an expense incidental to all por- 
tions of the wheat supply, and would enter into the prices" 
(p. 120). 

But the grazing use and countless other uses are really 
to be taken into account: "What really invalidates the 
Ricardian treatment is the fact that most land in use has 
several alternative uses o|* can contribute toward several 
different suppHes" (p. 120). 

That the Ricardian argument could in principle be as 
satisfactorily worked out at the intensive as at the exten- 
sive margin, we have already seen; and Hobson later 
turns his attention to this aspect of the case, and points out, 
among other objections, that a parallel line of reasoning 
could be equally well invoked to exclude wages and interest 
from cost. And surely the argument from the extensive 
margin is open to the objections raised by Hobson, as well 
as to others still more serious; the poorest of wheat land 
does actually pay an appreciable rent, and even were there 
any entrepreneur outlays justifiably to be excluded from 
the entrepreneur-cost computation, there is no very evident 
reason why, as an extensive-margin argument^ this poorest- 
land rent should not be included. 

But, as we have seen, Hobson does not greatly rely upon 
this objection; he is, indeed, clear enough that such condi- 



41 6 VALUE AND DISTRIBUTION 

tions might exist as to invalidate in this aspect the theoreti- 
cal tenability of the Ricardian position, but he is not clear 
that such conditions are actually existent. Not all land 
anywhere available is yet in actual cultivation; the "sup- 
ply contains more land than is required, some of which 
is slightly inferior to the worst land in use," so that under 
present conditions this objection "may be held to lie outside 
of practical economics for a country in open commercial 
relations with the world supply of land" ^* — which is cer- 
tainly generous enough in concession — and to spare. 

The serious difficulty, however, as Hobson sees it, lies in 
the second of Ricardo's assumptions, that of the wheat 
use as the only use necessarily to be considered in the analy- 
sis. Thus the issue is shifted to the significance of the 
alternative use. 

The conditions, rightly insisted upon b}^ Hobson as 
actual, may be illustratively presented as follows : Let the 
poorest wheat land in use command a 20-per-acre rent, with 
the better lands ranging at per-acre rents of 21, 2.2., 23, 24, 
25, etc., up to 30; at the same time assume that fruit, gar- 
dening, and tobacco-culture and the building demand bear 
with such relative intensity upon the better lands that these, as 
they are better and better, have smaller and smaller differen- 
tials above the alternative use, that is, that the alternative dif- 
ferentials upon the 30, 29, 28, 2"^, 26, 25, 24, 23, 22, 21, and 
20-hire lands are respectively -^, ^, ^, ^, -^, -^%, ^^, -^%-, 
^^, Y%. Hobson insists, then, that it is the 30-hire land that 
is marginal, that all of its rent is cost rent, is price-deter- 
mining rent, and that with the other lands, ranging down to 
the 20-hire land, the cost rents are, — 

On the 29 hire land 28-^3 

" " 28 " " 27A 

" " 27 " " 261V 

" " 26 " " 25/0 

^5 241 

24 23tV 

^* Ibid., p. 120. 



ATTEMPT AT RECONSTRUCTION 417 

On the 23 hire land 22-i\ 

" " 22 " " 2ItV 

" " 21 " " 20T^ 

" " 20 " " 19 

and that the price-determined differentials are 30—30=0; 
29 — 28y^^=y1o; 28 — 27^=y2^, etc., increasing to a unit of price- 
determined differential for the 20-hire land.^s 

" It must in fairness be said that Hobson does not himself put his 
case in the precise terms of the illustration offered ; the details of the 
scheme of statement are not his, but those of the present writer ; but the 
argument seems to imply them, and it is primarily and chiefly to the 
end of assigning to the argument its clearest, shortest, and most 
effective statement that this particular device of presentation is adopted. 
It must, however, be at the same time admitted that this manner of 
exposition is chosen in some measure with a view to bringing the issues 
of criticism into clearer and more telling definition. If any injustice is 
done, it may be pleaded that it is not intentional ; but there is perhaps 
the more urgent call that whatever justification the facts afford be 
promptly submitted : 

"Though the worst grazing land may pay no rent, the worst wheat 
land might be better for grazing than the worst grazing land, in which 
case it can only be obtained for growing wheat by paying a little more 
than its differential rent for grazing purposes ; this rent for the worst 
wheat land will be a positive rent, and will enter into wheat prices ; 
again, the worst market-garden land competing for a given market 
may be tolerably good wheat land, and, if so, the rent which it could 
get for wheat forms a marginal rent for market-garden land. So as we 
ascend to the higher and more special uses of land, we find that the 
differential rents must be measured, not from a no-rent margin, but 
from a minimum specific rent of a higher and higher order, until we get 
to city ground, which is measured from a minimum which must exceed 
the rent which that land could obtain for the best agricultural use to 
which it could be put" (pp. 120, 121). 

"For the sake of simplicity I have assumed that the marginal rent 
is directly and exactly determined by the alternative use of the worst 
land in cultivation for each use. But this, of course, is not necessarily 
the case. It is not necessary that the worst land should have an alter- 
native use ; it may be some better land, enjoying a differential as well as 
a marginal rent, which occupies that position. The worst wheat land 
might obtain a marginal rent of 20s. per acre ; superior qualities of 
wheat land might take higher rents rising to 40s, Suppose that some 
of the land rented at 30s. had another use which would yield a rent of 
2gs. ; it is evidently this land which fixes the marginal rent ; it must 
receive 30J. in order to induce it to contribute to the wheat supply, 
and the 20s. taken by the worst land measures its inferiority of wheat- 
growing power as compared with the 305. land. It is possible that the 
20s. land might continue to grow wheat, however little rent was paid ; 
its rent is directly determined by the cost of keeping in the supply of 
wheat land the superior land at 30J. In such a case it will be the 
Zos. land and not the 20s. land which is the direct determinant of 



4l8 VALUE AND DISTRIBUTION 

Precisely where Hobson finds the ultimate forces of 
causation in the determination of the price of wheat is not 
readily made out; but it is clearly his view that, on the 
supply side, certain of these land hires, or, more accurately, 
certain portions of these hires, are to be regarded as causes 
of price rather than results, and that we must go to the 
market price of the land use, or of part of it, in order to 
explain the price of the product. 

But (i) how are these price-determining land hires 
themselves determined, and (2) through what bearing and 
in what sense and to what extent are they price causes? 

I. The determination of the value of the land use is 
held to be in principle precisely like that of the determina- 
tion of the price of consumption goods, in the sense, that 
is, that both are market adjustments worked out under 

price for the supply side in the market for sale of wheat-growing 
power" (pp. 123, 124). 

"Now what about the zqs. land, the worst wheat land in occupa- 
tion ? .... It is quite legitimate to suppose that the owner of this 
land, having no available alternative at any price approaching 20s., 
might have been willing to contribute to supply even if ... . 
the rent per acre .... had been at 16^. instead of 20s. In such 
case it will be evident that it is the owner of the 305. land who, in 
fixing for the supply side the price per unit .... determines the 
amount of rent per acre of the land at the margin of cultivation" 
(p. 125). 

"The determining increment of supply is not necessarily identical 
with the worst land contributing to that supply, commonly known as 
the margin of cultivation. If the slackness of the demand for wheat 
causes a fall of rent, it is not necessarily the 20s. land which passes 
out of cultivation ; it may be the 30J., if the latter has an alternative 
use and the former has not. The actual determination of rent by this 
method is, of course, complicated by the fact that as a rule not merely 
one part of the land supply, but m.any parts have alternative uses to 
which they would succumb, were the price for one use to fall below a 
certain figure. But it is reasonable for us to assume that the price per 
unit of land use is always determined by the common position of one 
part of supply, which at that price is just induced to contribute toward 
that supply in preference to some others ; the fact that at a different 
price per unit some other land would occupy this position need not 
concern us" (pp. 127, 128), 

This is perhaps the opportune time for presenting a resume of the 
different rent concepts, and, so far as is relevant to the present dis- 
cussion, Hobson's system of terminology with regard to them : 

Selecting out of our illustrative scheme the 30-hire tract or acre 



ATTEMPT AT RECONSTRUCTION 419 

entrepreneur bidding. True, the consumption good receives, 
on the cost side, its value from the value of the instrument ; 
and from this point of view there is doubtless a distinction, 
in that the value of the cost good — in this case the value 
of the land — is not, through an appeal to cost fixation, as 
readily explained, either in whole or in part, as is the 
value of the consumption good. On the whole, indeed, the 
land hire appears, as we have seen, to be in part derived 
from price and in part a determinant of price. But at any 
rate, as a question purely of the process of market adjust- 
ment, there is a complete parallel between the price of the 
land use and the price of the finished consumption good: 

In so far as the price of uses of factors of production is reached 
by competition and bargaining (and this is our hypothesis through- 
out), the mode of determining rent, interest, and wages will be 



of land, the rent concepts applicable to it would catalogue as follows : 

1. The entire hire, 30 shillings ; 

2. The differential hire above the poorest land in actual use, 30 
minus, say, 5=25 ; 

3. The differential hire above the poorest land in use in the par- 
ticular line of production, 30 — 20=10 ; 

4. The differential hire above the best alternative use, 30 — 30=:o. 
(With the 20 land in our illustrative scheme, this variety of differential 
is evidently i ; on the cranberry patch of our earlier discussions, this 
differential would include the entire hire.) 

"Now since it is convenient to retain the term 'margin of occu- 
pation or employment' to describe the worst or least efficient part of 
supply, some other term is needed to mark that part which occupies 
the determinant place in any given market. I propose to speak of this 
portion as 'the determining portion of supply,' and of its owner as 
'the determining owner.' The worst land in cultivation for a particular 
supply will be described, in accordance with usage, as 'marginal land,' 
and its rent as marginal rent. 'Differential rents' will be the rents 
obtained by lands of superior productivity contributing to this supply, 
and will be measured from the margin" (p. 129). 

But upon the assumption, actually made by Hobson, that the lands 
are funded, there is surely no occasion for ranking any of the lands 
as worse or better or as more or as less efficient than any of the 
others. And one is minded to ask which of the two it is, the 30-hire 
land or the owner of the 30-hire land, that is determinant; or, after all, 
is it not the 30 of product displacement that is determinant, the land 
hire being merely the competitive expression of the displacement? 
In collectivist production, at any rate, there are alternative produc- 
tivenesses and differential productivenesses, but no rents, no hires. 



420 VALUE AND DISTRIBUTION 

essentially the same as that of determining the price of horses or 
wheat (p. 126). 

But precisely because the consumption good is a good 
price-determined through its costs, it must be recognized 
that when 

goods have been exchanged for goods, .... in order to under- 
stand more fully the nature of the bargain, we must regard any 
two commodities which have been exchanged as complexes of the 
various quantities of the factors of production that have entered 
into them in the various processes of production (p. 113) . 

This serves merely to emphasize that to understand 
prices, we must, on the supply side, with reference to land 
costs, determine the nature and quantity of the rent-cost 
elements in price; and thus we discover that 

a bargain for the sale or the exchange of finished commodities 
will depend, as far as supply forces are concerned, upon the con- 
ditions of a number of preceding, underlying bargains for the use of 
different kinds and quantities of land, capital, and labor power 
(p. 113). We regard the hiring of the factors of production as 
equivalent to the sale of their use, 

and thus as subject to all the possibilities of higgling, 
oppression, and forced gains (p. 114). 

Where shall we be able to isolate a rent which is price- 
determining in its entirety, that is, without adulteration of 
any price-determined elements? But in any case, what- 
ever rent comes to be selected as price-determining, it 
must, perforce, be a rent fixed through the market process 
of competitive entrepreneur bidding for the different land 
uses. And it is also to be understood that all these land 
uses are actually sold at the same ratio between their pro- 
ductivity which they offer and the price which they com- 
mand; that is, they are all funded into units of 
land-productivity service : 

In land, we must recognize that rent or price of land use is 
determined, just like the price of commodities, by the relative eco- 
nomic strength of buyers and sellers bargaining for a given quantity 
of land use and not for a given sized piece of land, though the 
language of these proceedings has reference to the latter. The sub- 



ATTEMPT AT RECONSTRUCTION 421 

jective valuations [offer prices and refusal prices] of a single owner 
and a single tenant (the final pair) fix the limit for the price of a 
unit of this land power, the stronger of the two fixing the price 
point (pp. 126, 128) ." 

Adopting, then, the supposition that "what is really sold 
in the bargaining between land-owners and cultivators for 
the use of wheat land" is not merely wheat-growing power 
or wheat-growing land but wheat land "as units of wheat- 
growing power;" that is, recalling that the land supply is 
conceived as a fund of abstract productive units — we turn 
to examine the process by which these wheat-land hires are 
adjusted. It is significant that for this purpose Hobson 
appeals to the concrete and actual and unfunded supply of 

^* But upon an earlier page (25), the criticism against the "whole 
mathematical treatment" was that it "rests upon the assumption of an 

infinite divisibility of supply The fact that supply is not in 

any case infinitely divisible impairs the practical service of the whole 
mathematical treatment." Thus "it is easy to see that there is a far 
greater elasticity in supply and in demand in a corn market than in a 
horse market, a far greater variety of possible prices with a far 
narrower interval between them. This signifies a far closer and more 
effective competition between buyers on the one hand and sellers on 
the other, the result being that the limits between which ordinary 
competition breaks down are much narrower" (p. 27). But surely 
competition should, theni, be perfect in the land market, upon the 
assumption that it is really funded into precisely equal, inter- 
changeable, abstract, productivity units. The truth of the case, how- 
ever, seems to be that Hobson regards land as funded for the purposes 
of cost theory, but as non-funded for the purposes of "forced-gain" 
theory : 

"Wheat or wool .... will, in theory and usually in practice, 
rank as a number of separate supplies subject to entrepreneur bargain- 
ing .... goods which are held to be identical in size and quality. 
Now in the market for the sale of the use of labor or land no formal 
reduction to equal-sized units takes place. Though the real object of 
sale is a quantity of productive power in land or labor, what is 
nominally bought and sold is the use of so many acres or so many 

laborers But while the bargainers express themselves in 

terms of acres or laborers, the real object of their bargain is the use 
of land power and labor power, and they are continually engaged in 
reducing acres and laborers to units of productive power when they 
buy and sell" (p. 114). 

"It is admitted [by whom ?] that what is really sold .... is 
units of wheat-growing power. The fact that the nominal subject of 
bargain is acres must not blind us to this undertruth" (p. 125). 

If so, then so much the worse for forced gains ; but Hobson does 
not so see the case : 

"It is the owner of the 30s. land who, in fixing for the supply side 
the price per unit at 5^., determines the amount of rent per acre of 
the land at the margin of cultivation" — the 20s, land (p. 125). 



422 VALUE AND DISTRIBUTION 

entrepreneurs and to their competitive bidding against one 
another; and it would thus seem that all the phenomena, 
forced gain or other, characterizing the price fixation of 
consumption goods must equally apply to production goods ; 
this is, indeed, Hobson's view: "If we regard the hiring 
of the factors of production as equivalent to the sale of 
their use, we are confronted with the investigation of the 
market for the sale of the use of various supplies of land, 
labor, and capital" (p. 114). 

But, if so, how shall productivity be funded unless also 
the utility in every particular stock or series of commodities 
be also taken as funded? This view must find its argu- 
mentative basis — if basis it have — in some sort of society- 
as-an-organism doctrine. And what, then, becomes of 
forced gains? 

We have seen that it is the 30^.-per-acre land which is 
believed to determine the price, that is, under the condi- 
tions as assumed, not the worst land, the 20s. land, but the 
best, the 30^. land, this latter being the land upon the alter- 
native margin: 

Suppose that some of the land rented at 30^. had another use 
which would yield a rent of 2gs.; it is evidently this land that fixes 

the marginal rent It is possible that the 20^. land might 

continue to grow wheat, however little rent was paid; its rent is 
simply determined by the cost of keeping in the supply of wheat 
land the superior land at 30s. In such a case it will 
be the 20s. land and not the 20s. land which is the 
direct determinant of price for the supply side in the 
market for sale of wheat-growing power (p. 124). The argument, 
.... though quite valid for showing that differential rents do not 
enter into price, lets into price any rents which are paid for the use 
of marginal land contributing to any supply. Land may be graded 
according to its economic uses ; the differential rents will be included 
in the market (and even in normal) prices (p. 130) . 

The subjective valuations of a single owner and a single tenant 
(the final pair) fix the limits for the price of a unit of this land 
power, the stronger of the two fixing the price point. This done, 
the rent per acre is determined by the net yield of land power in 
each grade of land. If the higgling of the market fixes the price 
of a unit at 20s., the best land available for that supply may yield 
two units of power per acre, in which case the rent per acre is 40.^., 
the worst land only ^ a unit with a rent of io.y. per acre (p. 127). 



ATTEMPT AT RECONSTRUCTION 423 

But if this is true, it must follow that all lands are 
equally cheap and equally dear ; and if so, all talk of areas, 
or of acres, or of tracts of any sort becomes irrelevant, 1,000 
acres of poorer land being both the price equivalent and the 
productivity equivalent of 100 acres of a better grade or of 
10 acres of the highest grade. This funding doctrine 
should, then, suffice to cancel all talk of marginal lands in 
any sense of marginal entrepreneur cost, or in any other 
sense than that of the nearness of the wheat land to the 
line of equal desirability for some alternative use. Under 
the doctrine as presented, all lands are equally expensive 
for wheat purposes, and, so far as entrepreneur outlays or 
entrepreneur grounds of interest are concerned, neither the 
20s. land nor any other can have a non-cost element in its 
rental. Here, indeed, it becomes clearly manifest that 
Hobson's analysis^ unconsciously collectivist in standpoint, 
really involves the entire abandonment of the entrepreneur 
point of view. 

For mark how this manner of computing entrepreneur 
costs by the displaced potentialities of the instrumental 
goods will affect the entrepreneur computation when car- 
ried over into the labor and capital fields; for it is to be 
recalled that Hobson protests vigorously — and rightly — 
against "that general tendency of economic science, 
especially in England, .... to assimilate the theory of 
the sale of capital use and labor power to that of the sale of 
goods, but to mark off the sale of land use as subject to 
quite other economic laws" (p. 116). 

I propose to bring the sale of the factors of production under 

the general laws of value and of price For this purpose it is 

necessary (i) to co-ordinate the three factors with reference to the 
conditions which regulate their price; (2) to show that their sales 
are in essence identical, as economic processes, with the sale of com- 
modities (p. 117). 

But if it is indeed true that the entrepreneur will reckon 
as his cost not his wage outlay, or some alternative open to 
him with regard to the application of his expenditure, but 
only the worth of what the laborers could respectively pro- 
duce in their next most productive lines of employment, 
and if, out of his capital-hire outlays, the entrepreneur is to 
be allowed to compute as cost only such part of this expense 
as represents, say, what his cotton machinery would have 
produced in a woolen mill, there is an end of all hope that 



424 VALUE AND DISTRIBUTION 

any entrepreneur anywhere will ever be able to determine 
his own or anyone's else cost of production of anything. 

The full significance of the alternative-margin analysis, 
as presented by Hobson, will be best appreciated if put in 
the form of a summary: 

1. Through the determinant power of the margin, we 
arrive at a price-appraisal of 5^. per unit of land power, 
for the land powers in the marginal land, — the 30^'. land, a 
6-unit tract. 

2. By reflection from this price, margin-fixed, we get 
the same price for all other equal land powers, and thereby 
a funded wheat-land-power productivity. 

3. This marginal land, the 30.?. land, also determines, 
on the land-cost side, the price of wheat, since this 30.?. land 
was at the alternative-use margin, and held the position of 
marginal-instrument cost. 

4. Having fixed the wheat price, and having fixed the 
rent accruing to those lands not themselves price-determin- 
ing, this marginal land (or is it the owner of the marginal 
land?) apportions to these other lands their supra-cost dif- 
ferentials of rent income, that is, their rent quantities above 
their necessary (price-determining?) rentals, attributing 
thus to them, — in our illustrative scheme, — price-determined 
rents of from-^ up to j^. These price-determined services 
from non-determinant lands are thus, as it seems, cheaper, 
for cost purposes, than the services of lands nearer to the 
alternative use, and yet the lands are funded into equal 
productivity units. 

And thus it appears that the marginal-land instrument, 
at the opportunity margin, is determinant and strategic to 
a degree not before appreciated even by the most pro- 
nounced advocates of the margin-fixation doctrine. 

But despite the fact that this manner of analysis makes 
impossible the entire entrepreneur-cost category, it still 
remains unclear whether the detemiinant margin is pre- 
sented as an entrepreneur margin or as an instrument mar- 
gin. The supply of wheat being a stock of similar items, 



ATTEMPT AT RECONSTRUCTION 425 

its price was determined, on the demand side, not by the 
entire demand but by the marginal bidder, on the supply 
side, not by the entire supply and not by any marginal 
entrepreneur but by the cost of production upon the alter- 
native-use margin, with the rent for this alternative use, — 
seemingly a rent for unfunded land powers, — functioning 
as one of the marginal and price-determining costs. The 
market value of units of productivity is thereupon fixed 
by the bidding of entrepreneurs for the services of these 
units, in view of the market price for their products. But 
here again it is the ozvner of the land upon the alternative- 
use margin — the land without an appreciable wheat differ- 
ential — who, having fixed the price of the wheat, now in 
turn, in fixing the price per unit of land use at 5^., deter- 
mines the amount of rent per acre for the land at the 
margin of cultivation, that is, the per-acre rent of the 
poorest land in the wheat use; and better lands thereupon 
obtain their differential of income as measured from this 
margin, according to their differentials of productiveness 
in the unit schedule. 

And thus it is on the whole evident why, with reference 
to the precise nature of this margin, Hobson says : 

Some other term is needed to mark that fact which occupies the 
determinant place in any given market. I prefer to speak of this 
portion as "the determining portion of the supply" and of its owner 
as "the determining owner" (p. 128). 

Both, then, seem to be determining. 

But there are other difficulties : 

Whether the determinant portion of supply of land be the worst 
land or not makes no difference; the price of land power and so the 
rent of different qualities of land, appears to be directly determined 
by the fact that some of the land has an alternative use, and that it 
may refuse to contribute to the supply unless a certain price is paid. 
But though the alternative price .... determines a lower limit of 
marginal rent, there is nothing to prevent the marginal rent rising 
higher than this. If the 30.?. land has an alternative use, it is pos- 
sible that use might yield only 2Ss.; now, though the owner of that 
land would consent to take 26s. rent, he may be able to get 30.?., 
because there is, for the time, an absolute scarcity of land available 
for this supply. In a word, he may be able, as the final seller, to 
take a forced gain of 5^., which corresponds precisely to the "forced 



426 VALUE AND DISTRIBUTION 

gain" in the price of the horse in our analysis of a market for com- 
modities. In such a case it might be best to distinguish the S^- from 
the 2SS.J and to class it as a third form of rent (p. 129) . 

But this is really not a new — a fifth — concept of land 
rent; it is merely a landlord's quasi-rent subdivision of 
concept I. 

And now note the implications: This 30^". rent upon 
land having an alternative use of only 25^. becomes the 
land-cost determinant of the market price of wheat; at the 
same time the cleverness of this particular landlord, as 
achieving in bargaining a forced gain of rent for his own 
benefit, has enabled him, as determinant owner of the mar- 
ginal land, to dictate the general price of units of wheat 
productivity, and to fix this price for all the different lands, 
with the result that all other lands as well as his own are 
achieving a forced gain of 2^5- above their "lower limit of 
marginal rent." That this may be nonsense is not to the 
purpose; to deny it is to deny to the marginal land (or to 
the marginal owner — which?) the determination of the 
price of products and the general rent determination for 
the different qualities of land ; and at the same time it is to 
deny the funding of land into productivity units. 

But now as to the precise correspondence of these 
forced gains to the forced gains in the horse market: If 
there is the alleged correspondence, it is so much the worse 
for the horse case; for where are the other tenant bidders 
that, with funded lands — or without — this ^os. or 25.?. land 
is left, with its 5^-. width of higgling-margin, to the 
bargaining contest of this marginal pair? Or is it really 
assumed that, except to this one tenant candidate, the land 
is not 30.9. land in point of desirability, but only 25^. land? 
But this would be to disturb the funding principle. And 
if the land is really 30.?. land to him and to other tenants 
generally, if only they would act upon their interests, are 
the 5^., over and above the 25.?. lower limit, really forced 
in the sense that they are unjustly gained at the tenant bar- 
gainer's expense ? Or is the full 30^-. the fair market value 
of the value-producing power offered for sale, so that at 
any rent less than 30.?., there would be a forced gain for the 
tenant at the expense of the landlord? And if the land 
were worth only 25^-. to other cultivators, but 30^-. to this 
one, what should be regarded as truly and justly its worth? 

The validity of the argument from the intensive mar- 



ATTEMPT AT RECONSTRUCTION 427 

gin to prove the non-cost significance of land hires comes 
in for searching examination at Hobson's hands. His Hne 
of reasoning in criticism of Mill and of Marshall, while 
perhaps not of greater interest than the foregoing, is of 
considerably greater cogency. 

Not overlong insisting upon the fact that the argument 
which at the intensive margin excludes rent from cost "can 
be similarly applied to show that interest and wages do not 
enter into price," Hobson proceeds to the discussion of 
what he regards as the fundamental error in the entire 
"dosing" method of argument, whether one or another of 
the factors of production be taken as applied in the dosino- 
fashion. His objection goes to the underlying supposition 
that any one of the three factors of production can be expe- 
diently and economically applied as the sole constituent 
of the expense dose. "The truth is that a certain har- 
mony of combination of factors exists for various produc- 
tive purposes; .... if there is a short supply of one 
of them at the former quality and price," one or both of the 
others will be substituted, but at an increased cost per unit of 
product; this must indicate that the proportions between 
the factors were wrong; it would have been better to have 
had more of the first: 

So when the final dose of capital and labor on a given piece of 
wheat land achieves a product which yields no rent, it means that 
with the same quantity of land use as sufficed for a smaller product, 
a larger quantity of capital and labor use has been combined; that 
as no more land use was employed, none was paid for (p. 138) . 

Or, better: 

We may consider a piece of land as containing various land 
powers, some high, some low, some powers so low that they require 
so large a proportion of capital and labor to utilize them that they 
only just pay to work. These low natural powers yield no net 
economic powers of production (p. 138). 

The cost is then the same for products raised upon 
non-marginal land powers as upon the intensive margin, 
and vice versa, since upon the intensive margin so much 



428 VALUE AND DISTRIBUTION 

more capital and labor cost [non-land cost, entrepreneur- 
capital cost] is incurred as the land-rent cost is less.^'^ 

Or put it in still another way: 

Suppose it [the extra product] is raised by a tenant farmer as 
part of the result of an extra last hoeing and ploughing on his 
land, it [seemingly] pays extra wages but no rent; if, however, 
instead of this extra hoeing and ploughing the farmer decided to 
hire one more acre of the same quality of land and spread the same 
amount of labor power over the larger area, the product of this 

last acre pays its rent but no wages The labor of working 

the .... last acre of land is certainly remunerated by wages, and 
at the same rate as ... . the other acres. Why, then, does it appear 
from the "dosing" illustration that the product of ... . the last 
acre pays no wage? (P. 140.) 

" No question can be raised as to the force and accuracy of this 
criticism for the purposes of the actual issue ; but it is none the less 
true that the argument is not quite accurately made. There is, in 
fact, no best combination of productive factors ; each entrepreneur has 
doubtless his own separate best, as depending upon his own personal 
equation, his total capital equipment, his credit, and his safe limit for 
using credit. But for each entrepreneur his best combination is a 
different one from that of any other entrepreneur, precisely because as 
entrepreneurs they are different ; and with each entrepreneur his best 
combination will be a new and different combination with every change 
in the relative costs of the various instruments and agents. Perhaps, 
however, the dosing argument might avoid the entire force of this 
general line of attack by reformulating the dose application in terms 
of doses of expense — of entrepreneur outlay — as applied to the land. 

But what is the size of the economic "dose" ? Is there an inten- 
sive margin to the extensive margin of land? 

If every other sort of land has its intensive margin, so must also 
the poorest of cultivated land and the poorest of pasture land ; the 
pastured cattle are in themselves capital doses. Absolutely no-rent 
land must then be land receiving only infinitesimally small outlays of 
expense: Unless (i) marginal land does not, for the earlier doses of 
expense, fall within the law of diminishing value returns ; in this case 
and up to this limit, the "doses" should rather rank as together consti- 
tuting one dose ; or (2) unless there is a limit of another sort to the 
subdivision of expense doses, a long-time, a season, or employment 
unit, adequate in point of amount to the duration of the undertaking 
in hand, and to the nature of the undertaking in hand ; the first unit 
dose must at any rate be large enough to make practicable the under- 
taking of the business, its size and the time involved in obtaining 
results both being considered. 

But in any case the dose is not a capital-goods dose or a labor 
dose but an entrepreneur-capital dose, a matter of quantum of expense 
rather than of the nature or the detail of the technological means or 
other means selected. 



ATTEMPT AT RECONSTRUCTION 429 

And why, also, when an extra dose of labor is applied to 
the land, assume that all the increase in product goes to 
remunerate the larger quantity of labor? If it be, indeed, 
true that more labor can now be applied to the land, why 
was it not before applied? The rent that was being paid 
before was paid on the basis of what the land was worth 
under proper utilization; and when it now comes to be so 
Utilized and comes to produce what it ought all the while 
to have been producing, the belated increase in product is 
not to be regarded as due in its entirety to the new labor 
but also in part to the opportunity now belatedly utilized : 

If a tenant hires a piece of land and puts five doses of capital 
upon it when he ought to have put six, he pays a rent based upon 
the supposition that he will make a full economic use of the land, 
i.e., that he will put six doses on it. If, discovering his error, he 
afterward adds the sixth dose, he only appears to pay no rent out of 
its produce, because he has all the while been paying a rent based 
upon the supposition that he was working his land with six doses 
(p. 141). 

The land use is thus the basis of part of the price-deter- 
mining cost; true, no more is now being paid for the land 
than was before paid, but the price now being paid for a 
utilized land service was before being paid for a non- 
utilized service; one does not have to pay more for the 
land when adequately supplied with labor and capital than 
before when it was inadequately supplied : 

If I rent a piece of land in Picadilly, in which all houses are 
three or four stories, the rent I shall pay will take into consideration 
the capacity of the ground for building a three- or four-story house. 
If I choose to put a one-story house upon the ground, the rent I 
pay will be the same as if I had more fully utilized the site. If I 
afterward add stories, it will seem that I pay no rent for this extra 
accommodation, but in reality I have been paying it all the time 
(p. 142). 

Hobson's argument here appears to be unanswerable 
for the issues as they must present themselves, if "doses" 
are to be regarded as doses of the separate productive 
factors, rather than as doses of entrepreneur capital applied 
in every case under the direction of individual and peculiar 
entrepreneur initiative. The different entrepreneurs are 



43<^ VALUE AND DISTRIBUTION 

bidding for the use of entrepreneur capital — money, or 
goods, or credit, each in terms of money — or of instru- 
mental or other goods as reduced to the money denomina- 
tor, and, as such, making part of the entrepreneur fund of 
capital. Each entrepreneur bid, whether for entrepreneur 
capital, or for instrumental goods reduced to terms of entre- 
preneur capital, is never accurately a bid to get more of 
anything to put with his land or his capital goods or his 
employed labor, but rather to put with his entire situation 
as a whole, with his productive complex as an aggregate, in 
which he himself is a part. Thus, one entrepreneur will 
be directing his capital funds to the hire, or purchase, of 
machinery, another entrepreneur to the hiring of labor, 
another to renting land or more land, another to the 
purchase of fertilizers, or of barns, or work cattle, or dairy 
cattle, or for insurance outlays, or advertising, or taxes, etc. 

And out of all the entrepreneur activities in the supply 
of agents and instruments, and out of the entrepreneur 
competitions for the control of these agents and instru- 
ments, there undoubtedly come about market values for the 
raw materials, hires for the instruments and agents, a rate 
of time discount upon business capital, and a capitalization 
for such of the productive facts as are susceptible of 
capitalization. 

Nothing, however, so far adduced denies that the entre- 
preneur in making his bids proceeds upon what is essen- 
tially the dosing method, if only the capital nature or 
capital denominator of his method be recognized. But 
even under this interpretation, Hobson is right in insisting 
that, in accurate analysis, neither the entrepreneur's maxi- 
mum bidding disposition nor his actual price outlay is 
based upon or expresses any separate and specific produc- 
tivity of the dose fact under consideration. Any separate 
productivity of this sort the entrepreneur himself could 
not isolate. He needs the fact in question to go along with 
his aggregate situation, his entrepreneur complex, and to 
become a constituent part of it; he can easily compute 
what he can afford to pay for the accruing advantages, due 
in part to the independent productivity — if there be any — 
which the new fact bears in its own right, in part to its 
added productivity in its new setting, in part also to the 
added productivity which the old facts take on in their 
new association and relationship ; so far as the productivity 
is a matter of the interrelations of the different parts in 



ATTEMPT AT RECONSTRUCTION 43^ 

the entrepreneur complex — the entrepreneur being himself 
a part thereof — and a matter of the organization of the 
complex, there is a productivity which defies any attempt at 
distribution. 

It remains true, however, that the entrepreneur can 
readily tell hozv much he would if necessary pay, and how 
much he must pay, and this is all that, in this aspect, is 
necessary for the validity of the dosing argument. 

"But," Hobson says, "the 'dosing' illustration is 

vitiated by a more fundamental flaw We may 

suppose that he [the laborer] is in full knowledge of the 
facts and has a full exercise of choice ; as a consequence, 
he estimates that it just pays him to work five looms instead 
of four" (pp. 142, 143). Why say that the fifth loom pays 
him less or produces less or adds to his wage less than 
any other one loom out of the earlier four? "The fifth 
loom after it is added is found to be just as productive as 
any of the other four looms. The answer is plain. The 
fifth loom only just pays because its addition has injured 
his work with the other four looms." That is, each of the 
later stock is producing less than each of the earlier stock 
produced before, but any one item of the present stock 
produces now as much as any other one item produces now. 

That all this is true may be, and must be, admitted; but 
here again, there is doubt whether the argument is to the 
purpose as disturbing the dosing method. Let it be 
assumed that, to the four looms, 500 in product was to be 
attributed, 125 for each loom; but that with the five looms 
only 600 of product is obtainable, 120 per loom. Surely it 
is not true that in this second case the first four looms are 
to be credited with a return of 125 each and the fifth loom 
with a return of only 100. Under the new situation all are 
producing equally. Hobson is certainly right here. But 
it is nevertheless true that the productivity of the fifth 
loom, 120, is achieved only on terms of reducing the produc- 
tivity of each of the four looms from 125 to 120, with the 
result that the net advantage from having this fifth loom 
with its 120 of productivity is only 100; this 100 is, then, 
all that can at the outside be paid as the price of the value 
increase accruing to the whole situation by virtue of the 
hiring of the fifth loom. 



432 VALUE AND DISTRIBUTION 

The next objection, the third so called, is, in truth, not 
another objection, but merely another aspect of the first; 
as such, it must be accepted as tenable, but this only in 
view of the precise manner in which the issues in the 
discussion have defined themselves : 

Professor Marshall, in treating the marginal dose of labor in 
agriculture (e.g., the last hoeing applied to a field), admits that 
"the return to that last dose cannot be separated from the others," 
but, he adds, "we ascribe to it all that part of the produce which we 
believe would not have been produced if the farmer had decided 
against the extra hoeing" (Book IV, chap, iii, p. 144, par. 2). 

Marshall's argument must be admitted to be unfortu- 
nate; to make the best case for it, it is necessary, Hobson, 
believes, to state the thing affirmatively rather than nega- 
tively, the question not of what would be forfeited by the 
loss of one item out of the existing stock, but of what 
would be gained by the addition of another item. As the 
expense computation is forward-looking so must also the 
return computation be forward-looking. 

But Hobson, in condemning, like Wieser before him, 
Marshall's — as also later Clark's and Carver's — backward- 
looking, negative method of value imputation to productive 
agents, fails, like Wieser, to see that no ultimate conclusion 
is thereby established. Wieser had somehow deduced the 
tenability of the forward-looking addition method; Hobson 
infers the impossibility of any separate value imputation of 
any kind: 

Where it is essential to productivity that land, capital, and labor 
shall all co-operate, it is impossible to assign to any one of them a 
product based upon the supposition of a separate productivity. Simi- 
larly, where there exists a necessary organic quantitative relation 
between the factors, no separate product can be put down to any 
single dose of each (p. 147). 

But that this is true of the concrete commodity product 
does not necessitate the conclusion that it is true of the 
value product; and Hobson himself appears to assert that 
the increase of product at the margin or under the margin 
is due to the capital or to the labor application, since no 
valuable use of land is actually employed.^^ 

"As has already been argued, and as will later more fully appear, 



ATTEMPT AT RECONSTRUCTION 433 

But that entrepreneurs do actually bid not only for 
additional supplies of competitive business capital, entre- 
preneur capital, but also for different agents and instru- 
ments of productions — these all the while, however, reduced 
to terms of capital outlay, and so ranking under the com- 
mon denominator computation of entrepreneur cost — must 
still be admitted ; and this leaves the dosing principle good 
for all that, in the present connection, the rent-cost prob- 
lem, it was ever supposed to be good for. The real difficulty 
with the dosing principle is in the attempt to apply it in 
terms of the traditional categories of productive factors. 
The tripartite division is altogether inadequate to the case. 

But to acquiesce in the dosing principle as an entrepre- 
neur method of computation is not of necessity to concur 
in the conclusion that all rents, or any particular class or 
subclass of land rents, must be excluded from price-deter- 
mining entrepreneur costs ; in truth, the dosing method is, 
in entrepreneur computations, serviceable with reference to 
expenses in general, or with reference to any particular 
direction of expense. Thus we are constrained to deny 
that "the net result of this argument is that the application 
of the law of rent to the intensive cultivation of a single 
factor must be rejected as fallacious," but we none the 
less agree that the argument is fallacious as used to show 
that any form of land rent is irrelevant to the process of 
price fixation. 

THE VARIOUS RENTS IN THEIR RELATION TO VALUE 

Hobson argues, as did earlier Say, and as does later 
Fetter, that although land and labor are commonly regarded 
as having concrete forms, we are prone to regard the pay- 
ment for the use of capital as payment for the use of a 
money value of a certain volume. But Hobson insists that 
if any common law of price or of value is to be worked out, 
both land and labor must be subjected to the abstract- value 

Hobson's position is in fact correct with regard to the value product ; 
but the argument under consideration falls a good way short of prov- 
ing this. However, in a paper published in the September, 1904, 
number of the Journal of Political Economy, Hobson has presented 
a much more searching and in many respects a satisfactory analysis 
of this question. See, later, chap, xxii, p. 476, note. 



434 VALUE AND DISTRIBUTION 

measurement as cost values, or capital must be conceived as 
concrete forms of wealth serviceable in production: 

The actuality of a science of industry as distinguished from a 
science of finance requires us to take the latter course, and to treat 
capital as consisting not in money but in concrete forms of wealth 
serviceable in production (p. 151)- 

That one and the same treatment must be accorded to 
all productive agents and instruments ought to be accepted 
as past doubt, and it is to be counted to the especial honor 
of Hobson and Clark that they are first among modern 
economists to accept and to emphasize this fact, and are 
still almost alone in this acceptance and emphasis. But in 
point of fact the uses of labor and the uses of land do attain 
a value statement as everyday, commonplace, cost-value 
items in the entrepreneur-cost computation. Hobson, indeed, 
has himself gone so far as to reduce these land uses to an 
abstract fund of productivity units. Other economists have 
attempted a similar form oi funding for labor and capital, 
based, it may be assumed, upon the evident reduction of 
all of their productive services to the common denomina- 
tor of market price. 

But there need be no disappearance of these separate 
and concrete existences, through the mere fact that all 
arrive at the common denominator of exchange relations in 
market price. And the fact that the customs and legal insti- 
tutions of modern society deny any capitalized value to the 
laborer, as distinguished from the daily putting-forth 
of his labor power, need cause no perturbation ; the labor 
use expresses itself in value precisely as do land uses and 
capital-goods uses. And the land, in receiving not merely 
a rental value but a capitalized value, remains despite that 
fact none the less concrete. So' there is at this point no 
especial occasion for Hobson to insist upon the concrete- 
ness of capital goods, and particularly no occasion for car- 
rying this insistence so far as to call for the abandonment 
of the market-value expression of the capital goods and of 
their productive services. But this latter course is the one 
chosen, most unfortunately, by Hobson; thereby, as it 
seems, he is compelled to abandon the common "business 
valuation of all capital as a valuation based upon the rate 

of interest No relation is possible between this 

capital and our other factors of production. We must deal 
with the concrete forms which are thus valued" (p. 152). 



ATTEMPT AT RECONSTRUCTION 435 

And, as it seems, he makes both uninteUigible and impos- 
sible his earlier notion of land as an abstract fund of value- 
productive units. 

Land and capital, Hobson urges, require no rent or 
interest for purposes of upkeep ; there are indeed upkeep 
charges, but all charges of this sort are met before the net 
income can be computed or be capitalized into present 
worth. But it takes some wage to maintain labor in exist- 
ence. "Thus it comes to pass that while the margin of 
land is no-rent land, the margin of capital no-interest capi- 
tal, the margin of labor is (say) 15^. labor." But "this 15.?. 
wage does not in any sense correspond to interest or rent. 
It is simply a wear-and-tear fund of labor, the expenditure 
necessary to replace the labor power given out in a day's 
work and to maintain the laboring population at their 

present numbers and at their present capacity 

It is wages above 15^'. that correspond to positive rent and 
interest:" and the fact that, unlike land, labor and capital 
have no sub-marginal representatives does not impair the 
setting; for there is a fund of capital safe to become actual 
if the rate of interest calls for it [but, one infers, not safe to 
relapse into non-existence if interest again falls], "while 
any rise of payment to the marginal i^s. labor will increase 
the supply of labor power, either by raising the population 
rate or by improving the efficiency of labor, or by both" 
(PP- 155, 156).''' 

"• "Whether it be true or not that the prospect of obtaining interest 
is a necessary motive to induce the creation of capital, it may dis- 
tinctly be affirmed that interest is not necessary to secure the economic 
maintenance of forms of capital that have been brought into existence" 
(P- 153)- Not so; there is needed the same inducement to prevent 
deterioration of the land, or of the capital, or the slow consumption of 
either that was needed to induce the creation or the improvement. 
Upkeep is a new capitalization ; if rent or interest only cover this 
charge, there is nothing left to overcome the abstinence protest against 
the postponed consumption involved in holding the wealth as instru- 
mental or intermediate goods. But it is fairly to be inferred that all 
forms of positive upkeep either of land or of capital are reckoned 
by Hobson as within costs. But here again it must be noted that since 
the upkeep requirement applies to land equally with capital, there is 
with land the same opportunity for abstinence and the same elasticity 



436 VALUE AND DISTRIBUTION 

And now to the question, What payments for use of 
land, capital, labor, enter as elements into market price of 

goods? it is repHed that — 

the same reasoning which shows that differential rents of land 

need not enter price shows also that differential payments for capital 

and labor need not enter price Just as rent of land need not 

form an element of cost or price in agricultural produce, some of 
which is raised on no-rent land, so interest need not figure in the 
cost or price of manufactured goods, some of which are produced 
by no-interest businesses, while similarly no cost of labor above the 
15^. depreciation fund need enter into the price of commodities 
partly produced by marginal laborers (p. 157)- 

It might, therefore, it is urged, be true that price should 
be determined by the cost upon no-rent land, cultivated by 
farmers obtaining no interest from their capital, and pay- 
ing only a bare subsistence wage to their laborers : 

But normally the last and most expensive portion of supply 
which rules the supply price will not be produced under conditions 

which exclude all rent and profit It will be more likely that 

the last portion of the supply will be produced partly on no-rent 
land, but paying an interest on capital and perhaps a wage far above 
15^., partly by tenant farmers paying rent but earning no interest on 
invested capital, partly by peasants paying rent or mortgage interest, 
but living on a bare subsistence wage. [And so] if the history of 
the most expensive portion of a wheat supply could be closely 
traced, it might well be found that some quarters of it were raised 
on no-rent land, others on no-profit capital, others on subsistence 
wages; but that an average quarter of this most expensive portion 
contained some element of rent or interest or higher wage, or all 
three. .[And so we get as the determinant of price a cost] not neces- 
sarily the minimum of rent interest and wages, but the lowest aver- 
age combination of the three Differential expenses of 

of supply, in, kind if not in degree, as with capital. And from the 
point of view of the individual calculation, either is immediately 
consumable since either may by sale be turned into immediate cash. 

As to the IS J. necessary upkeep for labor, it is to be said that 
whether or not it may apply as a long-time population doctrine, it is 
entirely irrelevant as a business — a financial — consideration to any entre- 
preneur producer. One can afford to deteriorate his laborers where he 
could not his slaves or his ox ; his laborers are not his. And note that 
the hirer of any agent has not the slightest interest, to ask how much of 
his payment is for rent or interest and how much for upkeep ; the pay- 
ment is in any case equally a hire and an expense. 



ATTEMPT AT RECONSTRUCTION 437 

production above this composite limit, whether they be rent, interest, 
or wages, will not enter into the market-price of the supply 
(pp. 158, 159). 

Probably the fitting course for one who altogether fails 
to understand is to ask questions : What "last portion" is it 
which, being price-determining, yet divides into "parts" or 
"portions" raised under all possible forms of co-operation 
of productive agents, by "numbers of farmers working 
under widely different conditions, some in old, some in new 
countries, .... some quarters raised on no-rent land, 
others on no-profit capital, others on subsistence wages" ? 
And even assuming that any portion of demand or of sup- 
ply, or any possible pair of traders, could determine the 
price, what has the sort of composite presented, — if any 
such there could possibly be, — to do with price fixation? 
And if somewhere there were found a man working on 
good-for-nothing land, and with valueless appliances in 
the hands of laborers paid at precisely the cost of their 
keep, what warrant would there be for assuming that this 
man's cost would either fix or be the market price? Why, 
if his emplo3^ees were exceptionally " efficient men, but 
grossly wronged under some forced-gain relationship or 
contract should not this exceptional farmer be making an 
especially and obnoxiously high rate of profits? Or, on the 
other hand, is there anything, except that he has nothing to 
lose, to prevent his making serious losses? And why 
should we, as the seeming beginning and occasion of all our 
troubles, have started with the assumption that good-for- 
nothing, powerless, no-rent land is, for economic purposes, 
land at all, or that rickety, payless, valueless hay- 
rakes are capital at all merely by the fact of being in con- 
crete guise and in the similitude of farm machinery? And 
is it true that "the 15^. wage does not in any sense corre- 
spond to interest or rent"? For is there not at any rate 
this much of correspondence, that, under competitive con- 
ditions, each productive agent gets recompensed in some 
approximation to its efficiency in the process of value pro- 
duction ? 

Or if it be answered that this determining cost and 
this determining unit or portion of the supply are not the 
cost or the supply of any one man or of any one place, 
whose then are they, and where are they? And if they 
need be of no one place, need they be of some one particular 
time, and why, or why not? And if they are some sort of 



438 VALUE AND DISTRIBUTION 

an average compounded of different marginal producers 
anywhere and everywhere, how compute supply as elastic 
through some composite-man's processes and choices? 
And of whose psychological processes could it be true that 
only i5^.-per-day labor would be computed as cost? That 
"the law of substitution has always to be taken into account" 
can rightly mean not that the actual rents and wages and 
interest are to be omitted from costs, but only that by so 
much as the cost expense in one or another of these direc- 
tions is less, by so much must it be more in the others ; 
excepting for differences in entrepreneurs all the different 
items of one supply would have the same cost. 

And as with land and rent, so with labor and wages; 
that the better lands are more highly paid than the poorer, 
or that the best laborers receive higher wages than the 
poorest, has no significance for the question of costs ; there 
is no reason to suppose that any grade of agents or instru- 
ments is better or worse paid than any other, in proportion 
to the efficiency rendered. The cheaper lands or the low- 
paid laborers are as dear at the price as the better. Inter- 
laborer rents, like land differentials, have no relevancy to the 
cost problem. If the I5.y.-man's wages enter into price, so 
must the 20s., that a man f as efficient gets, enter into price, 
and this to the extent not of i^s. only, but for the full 20s. 
And as with the better lands so with the better laborers or 
the better entrepreneurs; the best, as easily as the poorest, 
may be nearest to the margin of alternative occupation ; but 
not the outlay, were it less, nor any collectivist reckoning 
of some alternative concrete product, but the outlay as it is, 
has significance for the purposes of competitive cost. 



CHAPTER XXII 
DISTRIBUTION BY VALUE PRODUCTIVITY: CLARK 
The central thesis of Professor Clark's Distribution of 
Wealth^ is that the different distributive shares are the 
correlatives of productive efficiency, and that under static 
conditions and with frictionless competition these shares 
would be accurately correlative.^ As corollaries from this 

^ John Bates Clark, The Distribution of Wealth, a Theory of 
Wages, Interest and ProHts, New York, Macmillan, 1899. 

* "It is the purpose of this work to show that the distribution of 
the income of society is controlled by a natural law, and that this 
law, if it worked without friction, would give to every agent of pro- 
duction the amount of wealth which that agent creates. However 
wages may be adjusted by bargains freely made between individual 
men, the rates of pay that result from such transactions tend, it is here 
claimed, to equal that part of the product of industry which is trace- 
able to labor itself, and however interest may be adjusted by similarly 
free bargaining, it naturally tends to equal the fractional product that 
is traceable to capital." — Ibid., Preface, p. i. 

It is unnecessary to stop to discuss, or even to appraise, Clark's 
limitation of the subject-matter of the problem to concrete, material 
goods ; e. g. : 

"By wealth is meant those sources of human welfare which are 
material, transferable, and limited in quantity" (p. i). "Outward 
material things that are appropriable and, in this specific way, useful, 
are economic goods" (p. 41). "The great income of all society — that 
which is to be distributed — really consists of concrete articles, all 
of some use" (p. 13). It is unnecessary also to discuss his consistent 
utilitarianism, — mostly by assumption or implication, — or his pro- 
nounced and unquestioning insistence upon "natural law" as a causal, 
directive, and compellative agency ; e. g. : 

• "Is there a natural law according to which the income of society 
is divided into wages, interest, and profits? If so, what is this law? 
That is the problem which demands solution" (p. i). "There is, in 
short, a deep-acting natural law at work amid the confusing struggles 
of the labor market" (p. 2). "Where natural laws have their way, 
the share of income that attaches to any productive function is 
gauged by the actual product of it" (p. 3). "If the law on which 
property is supposed to rest, the rule, 'to each what he creates,' 
actually works, etc." (p. 9). "For the present, be it noted that 
exchanges divide and subdivide industry ; they range its forces into 
groups and subgroups, the functions of which are determined by 
natural law" (p. 20). "Dynamic changes are in another and broader 
sense natural. Nature herself is continually disturbing the regime of 

439 



440 VALUE AND DISTRIBUTION 

position or as steps in the argument by which it is reached, 
the following propositions become of especial significance 

natural prices but competition, is trying to restore it" (p. 79), etc. 
And it is unnecessary to discuss therewith the adoption of the asso- 
ciated ethical view inclining to identify natural law with provi- 
dential adjustment in such sort that optimism recommends itself as a 
scientific faith ; it is fairly to be said that while all these are issues, 
they are not issues by which the general positions of the author's 
theory of distribution must stand or fall. And while in this connection 
it is only just to say that in many of these formulations, such as, "A 
social law governs the apportionment and if this law could work 
without friction, etc.," Clark means in the main by "social" and 
"natural," merely static, it. is probably equally just to say that he 
often has in mind something very appreciably different, though he 
himself might be unable to say precisely what, — a mysterious, provi- 
dential, intrinsic something, more or less personal and wise and benefi- 
cent, by which it comes about, among other things, that all these 
natural results are fair and righteous and especially calculated to 
justify the ways of God to man, at the same time with furnishing a 
deep scientific basis for an optimism which would otherwise and in 
another sense be hopeless. 

But it is nevertheless to be said that this optimism, limitless in 
quantity and confirmed and radical in quality and often leading the 
writer to justify things which are least offensive when viewed apart 
from their moral quality, has yet no necessary part or share in the 
argument or in the conclusions of the book. 

And further : However much dissent or question may later come to 
be expressed as to the fundamental thesis that the "income that 
attaches to any productive function is gauged by the actual product 
of it ; . . . .to each agent a distinguishable share in production, 
and to each a corresponding reward, such is the natural law of 
distribution," it is no necessary part of the criticism that Clark believes 
that "more hangs upon the truth of it" than does really so hang. 
With the thesis once established he must still be indefinitely distant 
from justifying the present organization of society. It is clearly 
untrue that "the right of society to exist in its present form, and 
the probability that it will continue so to exist are at stake." One 
might concur in Clark's thesis and be yet the most radical of 
socialists. That rent is paid as the precise correlative of the pro- 
ductive efficiency of land has nothing to say as to the right of private 
o'wnership in land. Carver has made this clear in his review of the 
work under consideration ; nothing remains to be said : 

"The right of the present social order to exist depends upon the 
laws which govern not functional but personal distribution. Our only 
interest in functional distribution is due to the light which it throws on 
the vastly more important question of personal distribution. We need 
to be shown that the tendency of the present social order is to give 
to each individual producer the share which he individually creates, 
and no more." — T. N. Carver, "Clark's Distribution of Wealth," 
Quarterly Journal of Economics, Vol. XV, p. 578 (August, 1891). 

But here again Clark's argument and conclusions are in no wise 
involved ; the substance of the work is otherwhere. 



DISTRIBUTION BY VALUE PRODUCTIVITY 44i 

as indicating, for present purposes, the trend of the theo- 
retical analysis : 

1. Capital is regarded not as concrete capital goods but 
as an abstract, homogeneous value fund. 

2. For static purposes, land is assimilated to capital 
goods and funded Avith them into abstract capital, socially 
viewed. 

3. Labor is also funded into value-productivity units. 

4. Value expresses marginal utility, and is fixed and 
determined by marginal utility. 

5. All factor rents or hires are equally included in costs 
and ma<ie of precisely similar relevancy to price; but these 
remunerations are rather value-derived than value-fixing, — 
this last, however, not quite definitely beyond misinterpre- 
tation. 

6. The possibility, under the funding principle and from 
the group point of view, is asserted of isolating the separate 
productivity of units of capital and of units of labor. 

7. Distributive shares are determined by the value-pro- 
ductive power of the final unit of the funded productive 
factor. 

8. Society is viewed as an organism, and derivative 
concepts of group pain, group pleasure, group utility, 
group cost, etc., are adopted and emphasized as necessary 
to the argument. 

9. For dynamic purposes — purposes of retrospect or of 
prophecy — the tripartite division of productive factors, in 
the sense of mechanica| and technological categories, is 
made important.^ 

^Propositions (i), (2), and (3) should in this connection call 
for no further discussion, excepting possibly to the extent that in 
the consideration of the remaining propositions these earlier doctrines 
may be found explicitly or impliedly involved ; nor, seemingly, need 
any proof by quotation or citation be adduced that the positions as 
above formulated are actually held. 

With regard to proposition (4) also, when once it is established as 
actually held, neither criticism nor discussion would appear to be 
necessary for present purposes. 

In the interests of space and as intimately associated with 1(4), 
proposition (8) will best come in here for such citation and quotation 



442 VALUE AND DISTRIBUTION 

Propositions (5), (6), and (7) present the issues with 
which the immediate discussion is chiefly concerned. 

as may reasonably be called for, and for such discussion as the 
particular form of presentation may seem to demand : 

"In every stage of economic evolution wealth consists of useful 
material things ; but their utility is of the kind that we may call 
speciUc. Each part of the supply has some importance attaching to 

it Outward material things that are appropriable and, in 

this specific way, useful, are economic goods. 

"If an article is useful to one man, it is usually so to another, 
and is therefore in itself exchangeable" (p. 41). "If men do in fact 
use a number of units of consumers' goods, all of a kind, and if the 
specific utility of these goods diminishes as they get more and more 
of them, then what they will give for any one of them will be gauged 
by the specific utility of the last one. If these familiar premises of 
the modern theory of value correspond with the facts of life, the 
theory explains the prices of goods in a modern market" (p. 42). 

"The primitive [isolated] economy .... cannot test final 
. utilities in a market, for it has no exchanges. Can it not, then, test 
them at all, and does it not find it necessary to do so ? We may easily 
see that it does this, and that the purpose is exactly like that for 
which organized society makes the same test. The principle of final 
utility belongs in the first division of a theory of economics and has to 
be assumed in the second division" (p. 43). "The law of final utility 
fixes the point at which such a producer will stop creating one product 
and begin making another. A modern laborer, with money in his 
pocket, is supposed to consult the law of final utility in making 
purchases and to spend each dime where, in view of the supply of 

different things on hand, it will do him the most good While 

markets and prices are, therefore, modern phenomena, the study of 
which has no place in a division of the science devoted to universal 
truths, the law of final utility which directs the purchases that are 
made in a modern market also directs the production of the isolated 

man, and is a universal law of economics In modern life 

these laws direct the social demand for different goods offered in the 
shops ; but in primitive life they control the manner in which a man 
husbands his productive power and uses it where it will do him the 
most good. The law of final utility is common to both economies" 
(p. 44). 

"The picture of an isolated man turning his own labor from 
making one thing, of which he now has a supply, to the making of a 
thing that has a higher final utility, illustrates a characteristic of 
modern life which is in danger of being overlooked. Through the 
laws of value, society, in its entirety, is doing exactly this. It is 
turning its collective energies from one direction to another, according 
to the law of final utility. Markets and values afford the mechanism 
for doing this. Think of society as 'an isolated being, turning its 
collective energy to the making of one thing till it has enough of it, 

and then making another, and you have the fundamental fact 

Through the mechanism of a falling price, society is warned to turn 
its energies to the making of something else ; and its whole procedure 
is nothing more nor less than doing what an isolated man would do, if 



DISTRIBUTION BY VALUE PRODUCTIVITY 443 

It would not, perhaps, be fair to ask whether Clark 
regards costs as determining value, or rather value as 

he found his want of one commodity becoming satiated. If then we 
individualize society, if we make it to be in its entirety one isolated 
being, and if we give rein to that philosophy which treats a body of 
independent beings as one organism, we find it doing what a solitary 
man would do, under the influence of the law of diminishing utility. 
Putting a price on each article in a market is the act of the collective 
organism in estimating the importance to itself of each of its own 

products Each man pursues his own interest; but as the 

outcome of his activity, society acts as a solitary man would act 
under the influence of the law of diminishing utility" (pp. 45, 46). 

"Market value, then, is a social phenomenon ; but the principle 
of final utility, by which values are fixed, is universal in its scope" 
(p. 47). 

"By a law that Austrian studies have made familiar, the value of 
any article in this series of goods of one kind is fixed by the utility 
of the final one — final utility universally gauges value" (p. 163). 

"If there are marginal laborers, in the sense that there are mar- 
ginal quantities of wheat, cotton, iron, etc., then these final or mar- 
ginal men are likewise in a strategic position ; for their product sets 
the standard of every one's wages" (p. 90). 

"If the man gives to an employer more than he gets from him, an 
inducement is offered to other employers to take him at a better rate 
of pay. Men in other occupations are in the same strategic position, 
and the wages of social labor equal the product of a composite final 
unit of it. 

"How is this product to be measured? Take away one social 
unit of labor, and see what is lost by the withdrawal of it ; or add 
one such unit and see what is gained by the addition. In either case it 
is possible to note the amount of product that is separately due to a 
unit of labor and to no other agent. Let us, then, withdraw what we 
have called a social unit of labor. This is a composite unit, consisting 
of some labor from every industrial group that the community con- 
tains. We will take away cultivators of the land, smiths, carpenters, 
weavers, etc., in carefully adjusted proportions, causing a final unit 
of labor to vanish from every specific industry" ^(p. 169). 

It will be especially in place to note here that Professor Seligman's 
interpretation of the relation of utility to price offer and to value is 
substantially identical with that of Professor Clark. 

Under the "General Law of Value" it is said : "Value is at 
bottom the expression of marginal utility. It follows that all prices 
must therefore be studied from the point of view of marginal utility ; 
that is, of the power of marginal increments of supply to satisfy the 
marginal increments of demand. This is only another way of stating 
that the fundamental explanation of value is marginal efficiency or 
the capacity of marginal units to satisfy marginal wants." (Seligman, 
Principles of Economics, p. 262.) "The contribution or efficiency is 

the positive cause; the cost of production adjusts itself to this 

The cost adjusts itself to the service" (p. 265). 

"Cost of production is thus only a partial, and even then approxi- 



444 VALUE AND DISTRIBUTION 

determining costs ; his analysis goes neither far nor deeply 
into the value problem. To be strictly relevant to his 

mate, explanation of value ; marginal efficiency is the universal and 
ultimate explanation" (p. 265). 

"There is an abundance of silver below the surface that is not 
mined because it will not pay ; if the marginal efficiency or value of 
silver should rise, these more expensive grades would at once be 
marketed, and the new marginal cost of production would adjust itself 
to the price. The price would not rise because the cost increased ; 
but the higher price would be fixed at the higher cost because that 
would now be the new point of marginal efficiency" (p. 264). 

Professor Seligman's work is, however, of especial interest in 
this connection by virtue of the thorough, consistent, and systematic 
manner in which he has carried this society-as-an-organism concept to 
its logical limits — whether of truth or of absurdity- — as an interpreta- 
tion of the entire body of economic doctrine. Such further criticism, 
then, as is pertinent to this particular aspect of Professor Clark's 
doctrinal position may well be merged with a discussion having pri- 
marily to do with Professor Seligman's more detailed exposition. The 
following is, for the most part, either reproduction or abridgment of 
the views of the present writer as elsewhere expressed in this con- 
nection. (See "Seligman, 'Social Value,' " Journal of Political 
Economy, March, 1906.) 

It is with Seligman, as also with Clark, most difficult to deter- 
mine the precise significance of such portions of the discussion as are 
devoted to the investigation and exposition of the categories of indi- 
vidual utility, individual marginal utility, individual demand, entrepre- 
neur supply computations, entrepreneur cost, individual sacrifice, 
individual pleasure, individual pain cost, individual profits, — surplus, 
competitive, and differential, etc. ; for in the main, all this individual- 
istic discussion must, seemingly, be regarded as really and funda- 
mentally beside the point, or, at the best, as only introductory to the 
point, — not precisely side issues, truly, and presumably not irrelevancies, 
but rather analogical, introductory, or superficial matter ; for the heart 
of the doctrine, the realities of the objective business situation are 
sought otherwhere. 

It is not, 'of course, to be taken as Seligman's intention to abandon 
any of his many formulations of the strictly individualistic sort; it 
still stands that "value is an estimate of the relative importance or 
utility of different quantities of goods" (p. 12) ; that "when we speak 
of the value of a commodity, we think not of the total utilitj' of the 
quantity taken by itself, but of the marginal utility as compared with 
that of a definite quantity of other commodities" (p. 179). 

But in view of the rich-man-poor-man complication, there must 
obviously be difficulty in finding someone to make the comparison ; 
a pint of champagne sells for the same price as a sack of flour ; are 
they therefore to have ascribed to them equal volumes of utility rather 
than merely an equality of command over purchasing power? Equal 
utility to whom ? Who makes the comparison, or for whom is it 
made? It is evidently not enough to assert that "value is not merely 
the expression of utility in general, but of marginal utility" 



DISTRIBUTION BY VALUE PRODUCTIVITY 445 

discussion, the question, — substantially the same question, 
nevertheless, — should be formulated to ask whether distribu- 

(p. 198). If values are really to be resolved into a common denomi- 
nator of utility something further is waiting to be done. 

The solution as offered runs : 

"It is society as a whole which sets a value [market value] upon 

things If an apple is worth twice as much as a nut, it is only 

that the group that uses apples and nuts finds, after comparing 
individual preferences, that the desire unsatisfied by the lack of an 
apple is twice as keen as that unsatisfied by the lack of the nut. 
Value, therefore, is not merely the expression of marginal utility ; 
it is the expression of social marginal utility" (p. 180). 

"Since value is a social conception depending on a comparison of 
diverse goods, and since this comparison is ordinarily made in society 
by their transfer from man to man, it is clear that the value with 
which exchange has to deal is exchange value" (p. 183). 

"Value in exchange is nothing but the expression of its true value 
to the members of the social group, that is, of its marginal utility" 
(p. 183). 

"Exchange power is based on the comparative estimates of direct 
social utility which gives to every owner of the commodity the indirect 
utility that fixes value in society" (p. 183). 

This, then, is the first step in the solution — that the utility which 
underlies and explains value is not individual utility, but social utility. 
And we have, as we shall later see, in addition to this social-utility 
concept, concepts of social pleasure, social pain, social demand, social 
supply, social surplus, diminishing social utility, diminishing social 
return, a social-labor unit, a social-effort unit, social sacrifice, social 
cost ; and finally, as the goal and summation of all this, social value, 
that is, market value. This will evidently bear looking into. 

Some linguistic uses connected with collective nouns will offer a 
point of departure. When thought of merely as indicating an aggre- 
gate, a unit, the collective noun takes a singular verb ; if regarded as 
a collection of units, it takes the plural verb. And so we say, "the 
committee was discharged," "the committee were unable to agree" 
(with one another) ; "was unable to agree" (with the conference com- 
mittee) ; "the army were marching" or "was marching ;" " the crew was" 
or "were exhausted." But one could hardly say, "the committee was 
unable to agree" (with one another) ; the agreeing has to be done by 
more than one person. 

Now, in many cases, though the act or the situation asserted 
is really one of each individual by himself, there is no occasion for 
insisting upon this ; no ambiguity or inaccuracy or misapprehension is 
involved in saying that "the battalion is eating its dinner ;" it is a 
shorthand fashion of speech, but is perfectly intelligible ; it is common 
enough to think of a battalion as a unit, and the act of dining is a 
simple one in which all join, and in which all comport themselves in 
pretty much the same way ; from the point of view adopted, the 
interest proceeded upon, the purpose in hand, no importance attaches 
to the fundamental separateness of the activities, and to their entire 
lack either of psychical unity or of purposive co-operation ; they are 



446 VALUE AND DISTRIBUTION 

live shares are to be explained as derivative from value or 
as causes of value; is value, that is, the intermediate step 

simply similar — roughly simultaneous — and are thought of in block. 
True, one man eats rapidly and another slowly, some little and others 
much, and a few sick ones not at all ; but the expression serves, and 
implies its own limitations of accuracy. 

And so of an army, when we say that "it marches," no doubt is 
even faintly suggested that each man does his own walking, works his 
own muscles, uses up his own tissue, and that presumably many are 
halt, while others limp, and some swear. But no one of these differ- 
ences signifies for the purposes of the thought in mind ; each man is 
separately getting ahead, moving along, like all the rest ; and so we 
say, "the army is," etc. — serviceable speech, though in strictness 
inaccurate, were any perversity bent on misinterpreting it. But when 
it comes to asserting that the army is brushing its teeth, or has stubbed 
its toe, or has a stomach ache, there is obvious difficulty. These 
things are not done jointly, co-operatively, by aggregates, and will 
not bear thinking over into this form ; the inaccuracy of the collective 
idiom is obtrusively manifest. 

And so we may speak of public opinion, the preference, or habit, 
or custom, or convention, of society ; and no harm need come of it, 
despite the fact that some men neither think nor choose in the manner 
implied, but have their own peculiar judgments or choices or wishes, 
and yet are members of society entitled to be included in any exact 
formulation ; everyone knows that the thought really runs upon 
majorities of " 'most-everybodies ;" that is, no harm need come of it, 
if only there were not people to take the notion of a "social mind" 
seriously, and to import into cases calling for accurate analysis, and to 
accept as sober fact, a mere figure of speech, or at best a loose analogy 
drawn from biological science. For to the biologists and the sociologists 
it is to be charged — or credited — that the society-as-an-organism 
formula has found its way into economic thought. And thus hereby a 
doctrine long since abandoned in economic reasonings is in the way of 
reappearing ; for have we not need of normals and averages ? Else 
our doctrine in getting accurate and actual will get difficult also. 
And so, by the aid of the sociologists, through the magic of the 
society-as-an-organism incantation, a resurrection miracle has lately 
been worked ; we salute the average man. 

One hesitates to approach the invidious task of assigning primacy 
in this new school of thought ; for that there is a new school, and that 
it has come to include a passably generous membership — somewhat 
localized still — and that its doctrine means much for the good or evil 
of economic science, is the excuse, so far as there can be any, for the 
present protest. But it is nevertheless to be said that Professor 
Seligman is the first writer who has seriously undertaken to carry the 
doctrine to its logical conclusions ; and thus it necessarily comes to be 
true that whatever is further said here is, in purpose and in practical 
bearing, impersonal, theoretical, and general in its reference, rather 
than primarily an examination of Professor Seligman's doctrine as 
such. 

And yet one asks one's self why, if it is all thus easy — this magic 
word "social" making all things plain — if the heart of the mystery is 



DISTRIBUTION BY VALUE PRODUCTIVITY 447 

toward explaining distribution, or are the distributive shares 
to be taken as the intermediate step, and value the goal? 

thus easily plucked out, why all this other talk of gross profits, neces- 
sary and minimum cost, individual cost, individual utility, marginal 
entrepreneurs, normal equilibria, true profits, competitive profits, and the 
like ? Why, indeed, any talk at all ? Everything will explain as a 
social resultant, if this passes as explanation. 

In this doctrine of social cost, social sacrifice, and social value, 
one must look to find, as apparently one does find, a renunciation of all 
allegiance to outlay cost, and a return to the distinctly pain-cost and 
pleasure-balance terms of analysis : 

"Cost of production is the measure of value ; but it is not, as 
Ricardo thought, individual cost. Marginal utility determines value ; 
but it is not, as Jevons thought, individual utility. Both cost and 
utility measure value, because .... marginal cost is always equal 
to marginal social utility" (p. ig8). 

"The sacrifice imposed upon society to secure anything is ... . 

the exertion needed to replace it Thus, when we speak of 

social cost, we really mean cost of production ; and when we say that 
value is influenced by cost, we mean that value is influenced by cost 

of production We think no longer of the sacrifice imposed 

upon any one individual, but only of the social sacrifice, or cost, 
embodied in the commodity ; or, rather, the sacrifice, or cost, to the 
individual is the result and reflex of the sacrifice to the community" 
(p. 197). 

"In society .... whatever the rate of exchange, it is only the 
social utility and the social cost of which the marginal degrees are 
equal. If a knife exchanges for a book, it is because the demand in the 
community as a whole is such that the marginal sacrifice to society 
of parting with a book is equal to the marginal pleasure of society in 
getting a knife. [Whereto goes the book, and whence comes the 
knife?] To put it more accurately, a knife will exchange for a book 
only because the sacrifice to society in making the knife, for which it 
receives in turn the pleasure of books, tends to equal the sacrifice of 
making the book, for which it receives in return the pleasure of 

knives (p. 197) To any individual the sacrifice may be less 

than the pleasure, but there will always be a marginal individual to 
whom pleasure and sacrifices are equal. The marginal pleasure in the 
aggregate tends to equal the marginal pain in the aggregate. The 
balance or equilibrium is between the pains and the pleasures of the 
sum of individuals The real equilibrium is a social equilib- 
rium The real cost to any member of society which influ- 
ences value is not the subjective cost to him" (p. 197). 

Now, what does it really mean to say that the marginal pleasure 
in the aggregate equals the marginal pain in the aggregate ? What is 
to be aggregated, even supposing the process to be a possible one? 
There is always a marginal person, it is said — one person "to whom 
pleasure and sacrifice are equal." But this man can have little to do 
with the case, for while there is such a man, "the real cost to any 
member of society which influences value is not the subjective cost 
to him ;" and, in point of fact, there is, after all, no such man, for 
"it is only the social utility and the social cost of which the marginal 



448 



VALUE AND DISTRIBUTION 



Or, again, is the fundamental problem one of value or is it 
one of distribution? Or, finally, are the two problems not 
really two but one? 

degrees are equal ;" we really think not "of the sacrifices imposed 
upon any one individual, but only of the social sacrifice or cost, 
embodied in the commodity ; or rather the sacrifice or cost to the 
individual is the result and reflex of the sacrifice to the community." 

Nevertheless, it is clear to Professor Seligman — and to us — that 
things have utility to individuals ; and somehow it must be true that 
"the estimate put by the individual on one commodity as compared 
with another is the foundation of all value" (p. 179). "Value in 
exchange is nothing but the expression of its true value to the mem- 
bers of the social group, that is, of its marginal utility" (p. 183). 

It is, indeed, true that by the possibility of exchange a commodity 
may come to have a greater indirect utility to its possessor than it has 
direct utility to him ; but can it have any utility to society greater or 
less than it has to him ? And in this computation is he, or is he not, 
a part of society? "Its indirect utility to me is the result of its direct 
utility to society." But what or who is this society whose direct 
utility is the cause of the indirect utility to the possessor? And how 
add together utilities to different individuals, "the members of the 
social group," so that a "direct marginal utility to society" may have 
existence ? 

It must be understood that with this latest school of value, as 
with its predecessors, the principle that demand and supply together 
fix price is, for whatever it is worth, freely accepted ; but all the 
while with this difference, that demand, as conceived by this latest 
school, is really not the aggregate of the separate individual demands, 
each with its own particular psychology and its peculiar explanation : 
"The demand that tells is the aggregate demand depending on the 
social utility" (p. 20). 

Likewise cost is essentially not a matter of individual outlay or 
sacrifice, working out into the expansion or contraction of supply, 
accordingly as individual preferences and profit may direct ; cost is 
rather a transcendental thing: 

"Since cost is a form of disutility, it follows that the real cost 
of importance in affecting value is social cost, and not individual 

cost Value is the measure of sacrifice. In what 

sense? .... Evidently not of individual sacrifice. A street- 
sweeper may work harder than a factory hand, and yet the value of 
his services will be less. Value is a social conception ; society puts its 
appraisal upon commodities. If value is a measure of sacrifice, and 
if value is a social estimate, value must be the measure of social 

sacrifice or cost The sacrifice of each is compared with the 

needs of society as a whole. The standard is social, not material. 
It is easier to be a street-sweeper than a skilled factory hand. Society 
is more willing to spare the former than the latter, for to replace the 
one, society must give up more of its energy than to replace the other" 
(P- 193). 

Note here that, precisely as when we were introductorily discuss- 
ing individual demand and individual cost, cost was made a derivative 



DISTRIBUTION BY VALUE PRODUCTIVITY 449 

It is evident that Clark regards distribution as in part a 
process under which an aggregate of value is, as product, 
apportioned to aggregates or groups of producers; in part 

of demand, so here, in the social computation, social marginal utility 
is presented as adequate and controlling for value ; but meanwhile our 
real problem of how to get over from the individual reckoning to the 
social explanation obtains admirable and adequate recognition and 
expression : 

"All value is the reflex of social marginal utility. We have now 
to study the nature of the social forces which operate to translate into 
actual prices on the market the feelings of the individuals that com- 
prise the group" (p. 223). 

If this problem is fairly solved, nothitig will remain to be asked ; 
but the difficulty and the regrettable fact of it all is that the transition 
over from the individual psychology to an alleged oocial psychology 
is nowhere seriously attempted, unless, indeed, the following may be 
taken to suffice for the purpose : 

"Cost means socially necessary cost — not pains (or their money 
equivalent) taken, but pains saved. It is only because individual cost 
tends to adjust itself to the socially necessary cost that we can roughly 
speak of the price of anything depending on its cost of production" 
(p. 244). 

"Socially necessary cost .... is the amount which the pur- 
chasers as a group are willing to give rather than make the article for 
themselves. If the individuals cannot reduce their cost, they will stop 
producing. If they reduce their cost below this point, the point itself 
will move" (p. 244), And so, then, it appears that individual cost does 
affect the quantum of the social cost. "Society will not be willing 
to give more, because what the producer can do, the rest of society can, 
if necessary, do. It is in this way that an equivalence is brought 
about between individual and social cost ; and it is only because of this 
equivalence that cost of production may be said to influence value" 
(p. 244). 

But in view of the fact that, by assumption, some individual pro- 
ducers will not be able "to reduce their costs and will stop producing," 
while, surely, other producers will so be able, what shall be made 
of the proposition that what some "producers can do, the rest of society 
can, if necessary, do" ? Are all consumers to be accepted as like all 
the producers, despite the fact that the producers are themselves 
unlike? 

Or perhaps the following should be cited upon the point : 

"Cost of production does not mean individual cost. Value, as we 
know, is a social conception ; the real cost of production which affects 
value is the socially necessary cost" (p. 243). 

"The law of exchange may be equally well stated as the law of 
comparative costs. I may be so much more intelligent than my 
furnace man that I could save much coal by tending the furnace myself ; 
yet I prefer to look after my business, and let him tend the furnace 
because it pays each of us to do so" (p. 226). 

"The important point is not that a commodity costs the producer 
something, but that it saves the consumer something. It may save one 
consumer more than another, but its value depends on what it saves the 



450 VALUE AND DISTRIBUTION 

as a process under which the original group holding or 
imputation of value is subdivided among the the smaller 
and subsidiary process groups representative of the prog- 
social group as a whole. This saving of social cost is what is meant 
by socially necessary cost The cost to the individual pro- 
ducer will adjust itself to the socially necessary cost, that is, the 
amount which the purchasers as a group are willing to give rather than 
make the article for themselves" fp. 245). 

Evidently, however, this reduces individual cost to social demand ; 
thereby cost comes, not to fix price, but to be fixed by price ; to make 
the determinant of value the question of what a commodity saves the 
social group is to abandon the cost for the utility side of the analysis. 
And thus, finding in cost no explanation of price, we are left to our 
further devices to explain that social price which lies behind individual 
cost. 

Or the explanation for shutting out from consideration all indi- 
vidual peculiarities may be that they are assumed, for theoretical pur- 
poses, not to exist. Still, if this were the view adopted, we should, 
as has already been suggested, be precisely back to the reasoning by 
averages characteristic of an earlier, and possibly a better, time. 
But space fails for the discussion of this question ; and we recall that 
our author has himself spoken decisively in condemnation of the 
economic man. There is also the further diificulty that, with this 
"average-man" analysis once adopted, there is necessarily an end to all 
talk of margins, social or other. 

The truth is, however, that these differences between individuals 
are fully recognized, but are regarded as somehow merged and lost 
in the social utility, the social cost, the social demand, etc. ; and yet 
the reasoning repudiates the economic man, declines any overt and 
systematic acceptance of the method of averages, and adheres 
resolutely and consistently to the marginal analysis. 

Just as upon p. 228 it was declared that "a dollar is of more 
worth to a poor man than to a rich man — its marginal utility is 
greater," and that "the price of an old master or a mediaeval missal 
will often depend on the wealth of the purchaser ;" but as it was 
nevertheless contended that "in the ordinary transactions of life, 
where we deal in masses of commodities .... this difference in the 
worth of money may be neglected," so now, in the discussion of the 
theory of interest, similar differences are likewise merged, the average 
method refused, and a cost-margin analysis — of the pain-cost type — 
presented : 

"The only way in which capital can be formed is at bottom by 

saving, by waiting, by forbearing (p. 319) The problem is 

one of marginal forbearance, that is, of sacrifice at the margin where 
he must choose between consumption and saving. The richer a man 
is, the more remote is the margin where he will have to decide. The 
saving of a dollar means something very different to a rich man and to 
a day laborer" (p. 320). 

"When, therefore, we say that interest is the result of forbearance, 
we really mean that interest is the result of marginal forbearance, 
or forbearance at the margin This marginal point will indeed 



DISTRIBUTION BY VALUE PRODUCTIVITY 45 1 

ress of the commodity through its various stages from raw 
material to finished product; in part, also, as a process of 
partition of the subgroup holding of value between the 
individual members of the subgroup. But it is not at all 
so clear whether this threefold view of the total distribution 
process is purely logical and analytical — merely one way of 
looking at the case — or is rather intended as realistic- 
ally descriptive of the objective facts, and as tra- 
cing the actual sequence and direction of the causal 
forces. But it is none the less important that an 
interpretation should be arrived at upon this point. 

be a different one for the rich and the poor [but not different ratio- 
wise], for the spendthrift and the miser, but this difference will affect 
the rate of interest as little as the relative wealth of the 
purchaser affects the price of wheat on the exchange. The value of 
wheat is the expression of its marginal utility to the wheat-using 
group ; the interest on capital corresponds to the difference in the 
marginal estimates of present and future uses for the whole capital- 
using group. Value in the market is social value" (p. 398). 

And all of this coheres logically with the doctrine of an earlier 
page: 

"Cost of production is the measure of value ; but it is not, as 
Ricardo thought, individual cost. Marginal utility determines value ; 
but it is not, as Jevons thought, individual utility. Both cost and 
utility measure value, because .... marginal cost is always equal to 
marginal utility" (p. 198). 

But it is more than possible that more than justifiable space and 
time have already been given to this social school of value. It remains, 
however, to query why, with all these social utilities, demands, sup- 
plies, costs, sacrifices, averages, and margins, we nowhere find any 
social rent or interest or wages. These, indeed, as categories of dis- 
tribution, seem to be admittedly individualistic ; though no good reason 
offers why, if demand is social, consumption may not equally be so. 
But if wages, rent, and interest are admitted and accepted as categories 
of distribution — as individualistic shares received under individual 
claims for value-producing service rendered — it must follow that 
profit, a surplus or residual of some sort or other, is also an individual 
category. And these incomes of rent, interest, and wages — distributive 
shares to the recipients — are obviously costs to the entrepreneur, 
and as such lead up to individual supply, and through supply to 
market value, so far, at least, as market value is affected by supply 
influences. What will the social-value school do with this situation? 
In urging that not individual, but only social, cost is relevant to market 
value, the school will be under obligations to work out, as factors of 
social cost, a scheme of social wages, social rents, and social interest, 
and, as surplus over social cost, a social profit. 

In fact, however, it does not do this. For, as soon as we turn 
from the value problem to the separate treatment of the distributive 
shares, we find ourselves to have descended from the cloud-land 
mysteries of transcendental economics to the old and beaten paths of 
the traditional analysis. 



452 VALUE AND DISTRIBUTION 

If the wages and rent shares, as determined inside 
the subgroup, are fundamental and ultimate, the way 
is clear for an adequate and consistent entrepreneur-cost 
analysis, but all the while with this one difficulty, that we 
must forthwith set about to find what determined these 
rent and wages shares. Or if we can start with the market 
value as cause, each group share and subgroup imputation 
and infra-group partition will readily resolve its difficulties, 
the entrepreneur of course being taken to be present ; but 
the difficulty will still remain of explaining that original 
value with which the explanation has improvidently set 
forth. And if, for the purpose, utility or marginal utility or 
subjective value be invoked, there is still no help, inasmuch 
as each of these assumes as fundamental to it the exist- 
ence of a supply. 

But how does Clark present the case and dispose of it? 
So far as, from discussions mainly introductory in charac- 
ter, a reply may be had to questions of this sort, it must be 
deduced from the following: 

There is a kind of distribution that does not fix the rate of 
wages and interest, but determines how much one industry, as a 
whole, including its laborers, its capitalists and its entrepreneurs, 
shall get, as compared with other industries. It determines whether 
one whole branch of business shall be more prosperous than another. 
This is an intermediate part of the general distributing operation, 
and it is accomplished by means of prices. When wheat, for 
example, is high in price, the farming industry is well paid, as com- 
pared with others ; and when wheat is cheap, that industry is ill 
paid. If what we have in mind is the so-called "market price" of an 
article, — the immediate price of any given supply of an article, — this 
kind of value governs what we may call group distribution. If 
steel, for example, sells at a high rate, a large income goes to the 
group that produces it. This income distributes itself somewhere 
in the group; but how much of it laborers get, and how much 
capitalists and employers get, is a question that we do not now 
raise. This is determined by an ultimate distribution taking place 
within the groups. Group distribution is a preliminary division of 
this social income, and it deals with branches of industry in their 
entirety. The terms of this primary division of the social income 
depend on the prices of different kinds of goods. Farmers want 
wheat to be dear, as miners want ore to be dear, etc. Prices, then, 
fix the incomes of these groups.* 

* Clark, op. cit., p. 12. 



DISTRIBUTION BY VALUE PRODUCTIVITY 453 

The creation of such a general stock of commodities for use is 
a great synthesis, which goes on in a systematic way. One group of 
producers makes the article A, another group makes B, another C, 
etc. As A is sold, the sum that is paid for it is apportioned among 
the entire group that makes it; and as B is sold, the returns from 
this sale are divided in the same way, among all who have helped 
to make this article. The prices of completed articles thus fix the 
incomes of groups in their entirety. These groups are, in an equally 

exact way, divided into subgroups If wool is dear, farmers 

thrive; and if the difference between the price of wool and the 
price of cloth is large, manufacturers thrive. It is market values 
that fix the incomes of subgroups as well as those of groups. 

Neither of these price-adjusting operations, however, directly 
fixes wages and interest. This is the final and critical part of dis- 
tribution. It takes place within the subgroups, and it constitutes the 
third and final division that has to be made. The portions that fall 
to farmers, manufacturers, etc., as such, have to be further sub- 
divided; for a share must be paid to every laborer and to every 
capitalist 

This distribution goes on in three distinct stages. There are to 
be made a division, a subdivision, and a final subdivision of the 
social income. The first division fixes the income of industrial 
groups; the second fixes that of subgroups, and the final subdivision 
adjusts wages and interests within each of the innumerable sub- 
groups in the system. The shares of the groups and those of the 
subgroups depend entirely on the prices of goods, and therefore the 
fixing of market values results in the adjustment of the terms of 

group distribution Let A"' represent some one completed 

product, say bread; and let A represent raw material, the standing 
wheat of which it is made. A' may then represent the wheat as 

threshed A" may represent it as it is ground into flour. 

.... The difference between the price of A' and that of A" deter- 
mines the income of the flouring industry, etc. The income of each 
subgroup in the series, then, depends directly on prices. 

A philosophy that goes behind such market prices, however, 
brings us to what are called "natural" or "normal" prices. These 
are the values, expressed in terms of money, to which, in the long 
run, market values tend to conform 

A certain force that operates within the sphere of group distri- 
bution establishes the normal standards to which market values 
tend to conform Market prices fix the incomes of the differ- 
ent groups, as such, and so control distribution in its early stages. 
.... A deeper force, and one that also acts in distribution, controls 
normal prices. Market prices are the cause of group distribution; 



454 VALUE AND DISTRIBUTION 

normal prices are the effect of a certain phenomenon of distribu- 
tion The movements that make prices "natural" are, in fact, 

efforts on the part of different men to get their natural shares of 
income." 

In view of the fact that it is said that "the social 
process of production includes exchange and distribution," 
and that "the theory of value and that of group [italics the 
present writer's] distribution are one and the same" 
(p. 24), the general trend of the doctrine of the foregoing 
might seem to be that the value field and the distribution 
field are one field, and that the two problems are but dif- 
ferent aspects of one problem. 

But on the whole, the position seems to be other than 
this, viz. : 

1. That market value controls group distribution; 

2. That the market value distributed to the group con- 
trols the values assigned to the subgroups; 

3. That normal values control market values ; 

4. That (through fixing wage and interest incomes, and 
thereby fixing entrepreneur costs?) the distribution inside 
the group controls normal value. 

Rearranging the quoted passages in such fashion as to 
express the imputed sequence, and recognizing and accept- 
ing the attendant dangers of misinterpretation, the doctrine 
would run as follows : 

Market prices fix the incomes of the separate groups The 

fixing of market values results in the terms of group distribution. 
.... Market prices fix the incomes of the different groups as 

such, and so control the distribution in its earlier stages The 

income of each subgroup in the series, then, depends directly on 
prices . 

"Natural" or "normal" prices .... tare the values .... to 
which, in the long run, market values tend to conform. 

A certain force that operates within the sphere of group dis- 
tribution establishes the normal standards to which market values 

tend to conform A deeper force, and one that also acts in 

distribution, controls normal prices. Market prices are the cause of 
group distribution The adjustment of natural or normal 

° Clark, op. cit., pp. 14-16. 



DISTRIBUTION BY VALUE PRODUCTIVITY 455 

prices is a part of the distributive process. The movements that 
make prices "natural" are, in fact, efforts on the part of different 
men to get their natural shares of income. 

Being again interpreted, this appears to say that normal 
value controls market value ; that market value controls 
group and subgroup distribution; and that the distribution 
inside the subgroup controls the normal value ; that is, that 
the ultimate term in the causal sequence is this infra-sub- 
group distribution process ; everything else is derivative 
herefrom. 

If, however, there is any seeming of circuity here, it is 
due rather to the sentence-juggling device than to the 
intrinsic thought; the difficulty is not that the explanation 
offered is circuitous, but that in last analysis no explana- 
tion is offered ; but perhaps none should, at this stage of the 
argument, be required. 

Notice, at any rate, that it is not said that the actual 
market value of any time is determined by the normal 
value, but only that, in the long run, market value is con- 
trolled by normal value; it may remain true, then — and it 
really must be true — that no matter what the trend of things 
or the necessary long-time adjustment of them may be, 
the market values of any particular time are due to the 
situation, the forces, and the adjustments of that particular 
time. To subscribe to some long-time control over the 
short-time value disturbs in no sense this principle; the 
short-time value of any particular sort of commodity 
remains, for its time, the determinant of the group and 
subgroup distribution of that time. For purposes, then, 
of any short-time analysis, it would be necessary that some- 
thing be offered in the way of explanation of these short- 
time market values. 

But to the logical validity of Clark's position nothing 
need have been offered in this regard; for his problem has 
been specifically chosen as the problem of static distribu- 
tion; all, then, that is necessary is that he explain static 
value. The position on this point is as follows : Static 
values, as controlling group and subgroup distribution, are 
the result of the interest and wage apportionment , worked 
out in the infra-group distribution process. 

But it nevertheless appears to be true that the magni- 
tude of the group distrihuendum out of which, as a static 
problem, the specific wage and interest incomes are to be 



456 VALUE AND DISTRIBUTION 

apportioned, is controlled by static market values. The 
author's problem stands, then, if circuity is to be avoided, 
as an alternative problem — either (i) to explain the static 
value independently of the static distributive shares, or 
(2) to explain the distributive shares independently of the 
static values. 

But it is forthwith to be added that something purport- 
ing- to be an explanation of the distributive shares in this 
tertiary, infra-subgroup distribution is offered, which, in 
terms at least, makes no appeal to the support or aid of 
market values. 

The influence that brings production to this natural state is the 
effort of laborers and capitalists to seize any special gain that may 
be offered to them, by moving to any group in which the price of 
the product is high. This is clearly an operation in group distribu- 
tion. Thus an influence that originates in distribution brings about 
a state of social production in which exchange values are normal 
(p. 18). Prices are at their natural level when labor and capital in 
one industry produce as much and get as much as they do in any 
other. Normal prices mean equalized wages and equalized interest. 
If the prices of wheat, wool, iron, lumber, etc., were such that no 
laborer and no capitalist could acquire an enlarged producing 
power by leaving the industry that creates one of these commodities, 
and betaking himself to one that creates another, the price of each 
of the commodities would be normal (p. 16). The proximate cause 
.... is a state of production; that ultimate influence that controls 

it is an action of the forces of distribution Market value 

falls within the science of distribution. On the surface, it is current 
market prices that control the distribution which takes place among 
different groups or specific industries. These prices, however, are 
transient, and they fluctuate about certain more permanent stand- 
ards. The tendency of group distribution to become normal, that 
is, to bring wages and interest to an approximate equality in differ- 
ent industries, draws prices toward the normal standard 

What then, is left to be treated under the title, exchange? Only 
the actual passing of goods from hand to hand (p. 19). 

That the ultimate determinants of value and of distribu- 
tion must be of the general sort indicated is beyond ques- 
tion ; all the facts must contain within themselves all the 
explanations, causally speaking, though perhaps not descrip- 
tively or interpretatively speaking. But, for this causal 
explanation to stand as complete, more must be offered 
than the mere disposition of men to seek the direction of 



DISTRIBUTION BY VALUE PRODUCTIVITY 457 

maximum pleasure or of minimum pain, or even the direc- 
tion of maximum advantage or of minimum sacrifice; ac- 
count must also be rendered of the needs and desires of men 
for consumption goods, on the one side, — on the other side, 
of human productive capacities and differentiations, and of 
the objective productive equipment — inclusive of opportuni- 
ties, franchises, good-will, trade secrets, and purchasing 
power — in all its differentiations and adaptations and 
specializations and distributions. 

But if, for any normal equilibrium value or for any 
temporary equilibrium value, an explanation of the sort 
offered is the kind of explanation for which we are in 
quest, and if it is of a character to suffice for the problem 
of distribution within the subgroup, and thereby to furnish 
the basis for the explanation of costs and market values, 
and thus to establish distribution as fundamental to value, 
why pursue this subject farther or any subject farther? 
Why need anything more be said for either the value prob- 
lem or the distribution problem? All the causes are surely 
adequate to explain all the results. The difficulty, however, 
is that on this level of explanation both value and distribu- 
tive shares are equally results, and results of the same 
order, and neither is — or can be — shown to be the inter- 
mediate cause of the other. And regarded from this point 
of view, the explanation of distributive shares, whether 
looked at as a problem of process or of causes, is neither a 
group nor a subgroup investigation; the individual choice 
of personal activity and of investment application is a 
choice wide as the whole field of capacity and opportunity. 

But further : Accepting it, for the time being, as true 
that the ultimate adjustment, when reached, is an adjust- 
ment presenting equalized wages and equalized interest 
(property rentals?), as the result of the free play of choice 
between competing opportunities, and not at all stopping 
to wonder why and in what sense all wages can possibly 
become equal, it is still to be objected that these competing 
opportunities are themselves mainly the expression of an 
existing value situation; each individual's choice is made 
within this value situation and as directed by it. True it is 
that the entire situation of needs, capacities and posses- 
sions, adjustments, and distributions, may be taken as 
fundamentally directive and causal, but not so the indi- 
vidual choices made within the conditioning and directing 



458 VALUE AND DISTRIBUTION 

situation, nor, for that matter, all the choices, excepting 
with the tacit assumption of all the situation and in connec- 
tion with it. The individual choice, or even the aggregate 
of choices, is far more result than cause, with the indi- 
vidual activity infinitesimal reacting as cause upon the 
entire situation. 

And if any attempt is made, in the line of explanation, 
to go farther than an appeal to this huge and vague situa- 
tion aggregate, and if definite and detailed explanation for 
anything be offered in terms of intermediate causes and 
sequences, there will forthwith come the abandonment of 
any further talk of value as the cause of any distributive 
shares, group or other, or of distributive shares as the 
causes of value ; the investigation will be compelled to refer 
itself to actual business processes, to the machinery and 
methods and adjustments of a competitive society under 
entrepreneur organization and direction. Any investigation 
that approaches distribution, leaving value aside or treat- 
ing it as a problem to be solved by some casual and taken- 
for-granted appeal to distributive shares as the basis of 
entrepreneur costs, is for practical purposes no solution 
at all. 

But another solution may possibly be open, for what- 
ever it is worth, a solution so readily deducible from the 
organic concept of society that it may well have seemed to 
dispense with any special labor of exposition : 

Conceiving of Crusoe as a desiring fact as over against 
Crusoe as a producer pain-burdened in his processes of 
production, and setting him upon some assumed island of 
definite possibilities and limitations, we have seen it to be 
possible to deduce a fairly workable value doctrine for the 
isolated economy. If, then, society may be taken as having 
social needs and desires, and thereby a derivative social 
marginal utility and a social subjective worth and a social 
subjective value, — and if, over and against this demand term, 
there are social pains and abstinences and sacrifices ade- 
quate to function as cost terms in the value equation, no 
further assumptions appear to be called for ; a complete 
account has been rendered of market value, for, fortunately, 
the environment does not also have to be obtained by this 
process of assumption. 

And thus, with the market vadues all satisfactorily 



BiStRIBUf ION BY VALUE PRODUCTIVITY 459 

explained, nothing remains to be done but to deduce the 
distributive shares. 

Precisely so — but how deduce these? What problem 
of distribution is open? Distribution among whom? And 
under what basis of claim? Society did the producing and, 
by assumption, bore the pains thereof. Who, then, is this, 
or who are these now coming to demand that payment be 
had by some test of distinguishable, separable, and assign- 
able contributions, productions, and deservings? If value 
fixation is a social fact, — costs, pains, sacrifices, pleasures, 
marginal utilities, and effective utilities, all social facts 
attaching to the appetitive or emotional psychology of the 
social organism, — how comes it that "there are three generic 
shares that are unlike in kind," and that 

the entire study of distribution is .... a study of specific pro- 
duction; is an analysis of the wealth-producing operation, and a 
tracing back to each of the three agencies that together bring wealth 
into existence of the part which it separately contributes to the joint 
result. To each agent a distinguishable share in production, and to 
each a corresponding reward — such is the natural law of distri- 
bution.* 

That by Clark land and all other instrumental goods 
are reduced to one homogeneous fund of value units will 
at this point require neither illustration nor proof. Labor 
is similarly funded into a volume of homogeneous labor 
units. And, either as included within this labor fund or as 
basis of a distinct and separate fund, entrepreneur activity 
also must seemingly be subjected to the funding process 
and be reduced to a homogeneity of value units. Only so, 
in fact, is it possible to establish the central thesis of Clark's 
argument, the tendency, under normal conditions, of the 
remuneration of each and every unit in the fund to express, 
in precise equivalence, the productive contribution of that 
unit: 

There is before us the picture of social labor co-operating with 
social capital. Both are governed by the law of diminishing returns, 
and their earnings are fixed by the productivity of their final units. 

" Qark, op. cit., pp. 3, 4, 



460 VALUE AND DISTRIBUTION 

.... Wages conform to the final unit of social labor and interest 
to the product of the final increment of social capital.' 

But "how may we measure labor, capital, and their 
products" so as to make certain whether this proportionality 
of remunerations to funded units everywhere holds? "We 
need, evidently, a universally usable measure of value." 

"Provisionally, the 'doses' of capital are measured in 
terms of money; but it is necessary to know exactly what 
the money ultimately represents." ® Is this ultimate under- 
lying verity — this definitive fundamental fact in value — 
an objective labor homogeneity? Or is it a personal-sacri- 
fice homogeneity? "If it means either of these two things, 
it is still necessary to find some way in which to express 
a measurement of labor or of sacrifice." And to Clark "it 
is clear that the [value] product of the capital cannot, in 
such connections as these, be the basis of the measurement 
of the capital," for this would be circular in reasoning: 
"If we say that whatever produces a unit of consumers' 
wealth is a unit of capital, we assert nothing by adding 
that, at any one time, all units of capital are equally pro- 
ductive." So it is only provisionally that the doses of 
capital are measured in terms of money; we must, it is 
said, go deeper than this : 

A universal unit for measuring economic value is necessary, if 
the law of final productivity is to have scientific exactness. The 
entire study of wealth is, indeed, meaningless, unless there be a unit 

for measuring it Ratios of exchange alone afford no answer 

to the economist's chief inquiries. The actual wealth of a com- 
munity consists in heterogeneous things. If they are ever added 
together, it must be because there is some one element found in all 

of them and this element is absolutly measured There is one 

element that is common to all the diverse things that appear in the 
inventory of social wealth. In every commodity there is a power of 

a certain kind which can be measured There resides in each 

of them a certain amount of influence on human well-being 

Effective utility is the name by which this potency of goods will here 
be designated Effective utility is the basis of values." 

Effective utility is, then, the common denominator into 
which all values are to be resolved and by virtue of which 

^ Qark, op. cit., p. 373. 

^ Ibid., p. 374. ^ Ibid., pp. 375, 376. 



DISTRIBUTION BY VALUE PRODUCTIVITY 461 

each and all come to be rational, intelligible, and compa- 
rable. And this is in line with the doctrine, already noted, 
that "the principle of final utility by which values are fixed, 
is universal in its scope." '^^ 

■'Final utility universally gauges values." ^^ 
That is to say, effective utility and final utility are 
essentially the same. True, "amounts of wealth are usually 
stated in money ;" but the coins are not really the measure ; 
they merely express power over the things that afford 
service : "They will buy goods or set men to working. 
There resides in each one of them a certain amount of 
influence on human well-being;" they control effective 
utility. "Effective utility is the name by which this potency 
of goods will here be designated." ^^ 

But admittedly some things have utility not because 
they give us pleasure but because they shield us from pain ; 
and Clark insists that this pain-avoiding quality is the char- 
acteristic and essential and ultimate fact in all effective 
utility; the marginal-utility analysis does not go deeply 
enough, or, rather, it does not bring out quite adequately 
the important aspect, the sacrifice aspect, of things of 
service : 

Give to a man a barrel of flour and you make him by so much 

better off If you had not given him the flour, he would have 

got it by some sacrifice; and what you have done is, in effect, to 
save him from sacrifice. This effect measures the value of the 
flour.^' Take away a barrel of flour that the man now has, estimate- 
the real detriment that he suffers, and you measure the effective 
utility in another way." 

Is this subjective worth? It looks like it; but if it is 
assumed that the loss must be made up by labor rather 
than submitted to directly or, perhaps, shifted to something 
else, the doctrine diverges from the Austrian analysis, and 
— still more — diverges from the truth. And if it be admit- 
ted that the loss has not, of necessity, to be made good, or 
that, if made good, it may be at the cost of some substituted 

^"Ibid., p. 47. "^Ibid., p. 376. ^*Ibid., p. 377. 

^ Ibid., p. 163. ^ Ibid., p. 376. 



462 VALUE AND DISTRIBUTION 

service, we have nothing but subjective worth, the cost 
aspect of utility, "the importance attached to a good as the 
indispensable condition, etc.," a purely personal category 
and an unrelated feeling magnitude. Clark continues : 

He must [?] have food, and will get it by sacrifice of some 
kind. He may not fully replace the sacrifice of the flour; for he 
may live on maize, and in that case the utility of the barrel of flour 
is gauged by the cost of the maize and the unsatisfied want of a 
better quality [or quantity?] of food. 

But later upon the same page the labor-necessity view 
is fully adopted: 

The final measure in the case is one of pain; for the ultimate 
injury that is done to a man by depriving him of any one means of 
pleasure, resolves itself into putting him under the necessity of 
enduring a certain amount of personal sacrifice in the effort to 
secure something that will effectually replace it." 

But in any case, we have arived at nothing more or 
other than the old difficulty with regard to either marginal 
utility or subjective worth; as a purely personal experience, 
unrelatable to the experience of any other person, and, as 
absolute feeling magnitude only most vaguely — as mar- 
ginal item of a series — related to any other experience of 
the same individual, it perhaps does not greatly matter 
whether the sacrifice be asserted to refer to the loss of 
utility merely or to the labor pain of replacement. If mar- 
ket value is to be resolved into a homogeneous fund of 
utility units, there are clearly some further steps to be 
taken, and these of a passably difficult sort. That these 
steps are, indeed, impossible of accomplishment, earlier chap- 
ters have sufficiently emphasized. It remains, then, to pre- 
sent, with the minimum of comment, Clark's proposed 
method : 

It is this process .... of determining how important it is to 
have one thing by ascertaining how much it will cost to get a very 
different thing, that reveals one special significance of a study of 
effective utility. Men pursue happiness in the generic, and the form 
in which it may come is secondary. The measurement of well- 
being, thus regarded in the abstract, is an occult but dominant fact 
in exchanges. A man may have a monopoly of one means of pro- 
moting happiness, yet he cannot set his own price for his wares. 
That is fixed by the cost entailed on the community by the effort 

" Clark, op. cit., p. 377. 



DISTRIBUTION BY VALUE PRODUCTIVITY 463 

to secure, by any means whatever, an equal quantity of happiness. 
Effective utility .... is measured by society as a whole; and in 
this lies the significance of the phrase, "measure of effective social 
utility." .... The price of a thing gauges its importance, not to 
one man, but to all men, as organically related to each other. The 
efficient serving power of an article varies in the case of different 

individual users, but to society as a whole it is constant Into 

the mysteries of distinctly social pyschology, therefore, the measur- 
ing process that gauges value must be traced. Essentially simple 
in nature is the operation, simpler even than the act of the man 
who decides how important a horse is to himself by seeing how 
long he must work to get a boat and a tennis outfit 

It is now necessary to give definiteness of meaning to the word 
social. There is such a thing as a unit of social improvement or 
detriment. It happens, however, that the detriment is more avail- 
able for measuring purposes than is the improvement; and so the 
final unit of value is the sacrifice entailed by a quantity of dis- 
tinctly social labor. Society, in short, sets value upon a thing by 
ascertaining how much work is necessary to replace it or to get an 
equivalent for it." 

It would seem, then, that in order to measure a unit of 
social utility, we must first make precise the notion of a 
unit of "distinctly social labor;" what, then, is this? 

Doubtless utility exists for each man and sacrifice exists 
for each man; but because each man can make these 
estimates for himself, does it safely follow that society can 
do the same for itself? And if we know how the individual 
man does it, shall we also know how society does it? So it 
seems : 

It may be assumed that whole articles are made by individual 
workers. As such goods leave the makers' hands day after day, in 
a continuous supply, they seek purchasers. No one man will take 

many, but society will take them all That each class of goods 

is made in great numbers by one man and consumed singly by many 
men, is the essential thing to be noted. 

It is the users of an article that can best gauge the well-being 
that it gives them, and they make the estimate continually. Shall I 
buy this article? .... Is this article or some other of equal cost 
the more desirable? .... If each man could measure the useful- 
ness of an article by the effort that it costs him to get it, and if he 
could attain a fixed unit of effort, he could state the utility of a 

"/Wd., p. 378. 



464 VALUE AND DISTRIBUTION 

number of articles in a sum total. Similarly, if all society acts in 
reality as one man, it makes such measurements of all commodities, 
and the trouble arising from the fact that there are many measurers 
disappears. A marlcet secures this result, for society acts as an 
individual unit — like an individual buyer." 

And similarly for the sacrifice, — which, we recall, has 
thus far been presented as a better measure of the effective 
utility than is the marginal utility itself, although this is 
not to be taken as in any sense an abandonment of the 
notion that all value resolves into and is nothing but effect- 
ive utility; sacrifice is somehow a better measure of utility 
than is utility itself; indeed, how can utility serve as its 
own measure? And it needs measure, while, it seems, 
sacrifice does not, or perhaps is more easily measured : 

Work .... consists of concrete acts of men; and these are as 
unlike in themselves as are the miscellaneous articles that are to be 
measured by them. Can we make one sum of the labor involved in 
cutting wood, in playing violins, in setting type, etc. ? Adding the 
unlike acts that constitute social labor is, it appears, as difficult as 
adding the products that constitute social wealth. There is need of 
a pervasive element in the actions, and one that can be measured. 
Such an element can be found ; for, as utility is common to all com- 
modities, so personal sacrifice is common to all varieties of labor. 
There is service rendered to man, on the one hand, and there is bur- 
den imposed upon him, on the other. Social self-service — the act of 
mankind ministering to its own needs — constitutes the whole eco- 
nomic process A point is to be found at which social costs 

of production offset and measure social gains We can .... 

estimate pleasure in terms of pain.^^ 

An isolated worker is the user of his own products, and he 
naturally works each day till it does not pay to work longer. 
Additional product might be gained by prolonging the toil, but the 
advantage of having it could not compensate for the sacrifices of 

making it The man that we are studying is a society by 

himself; he makes things and he alone uses them Of a society 

regarded as a unit the same is true. It produces for itself, and the 
burden of its final labor measures the utility of its final products, 
which is the same as the effective utility of any of its products 
created by the same expenditure of working time. Take away the 
articles that the society gains by the labor of a morning hour, the 

"Clark, op. cit., p. 380. ^ Ibid., p. 381. 



DISTRIBUTION BY VALUE PRODUCTIVITY 465 

necessary food, clothing and shelter that it absolutely must have, 
and to make good the loss it will divert the work performed at the 
approach of evening, which would otherwise have produced the final 

luxuries on its list of goods The things otherwise produced 

by that final labor will be the ones really lost, and their utility is meas- 
ured by the burden entailed in the creating of them Every- 
thing that is produced by one hour of social labor, whether that 
labor be performed early in the day or late, possesses an effective 
social utility that equals the absolute utility of the final complement 
of goods consumed; and this, again, is counterpoised and measured 
by the sacrifice which all society undergoes in the labor of its 

final hour Periods of labor are equal in effective disutility, 

and this makes it possible to use the labor of any period of a given 

length as a unit for measuring values In the subjective 

valuations of society, as an organic whole, the product of two hours' 
labor is always worth just twice as much as is the product of one. 
Mere labor time is an accurate gauge of the values of different 
complements of goods.^^ 

But a group of goods to serve as a social unit of con- 
sumption is one thing, and the separate items made by 
different individual men may be another; is "mere labor 
time .... also an adequate gauge of the values of the 
different articles that enter into the complement"? Here 
the answ^er appears to be that the utility of what I sell is 
measured by the pain of society in producing what I get 
in exchange for what I sell : "The pain that all other men 
suffer in making products for him represents the cost to 

them of what they get from him Price is, then, 

an indication of the social cost of acquisition of different 
commodities." ^° 

Recalling now that each unit of labor commands under 
normal conditions precisely the same remuneration as every 
other unit, we become interested to know how much labor 
of any given individual constitutes a labor unit. Evidently, 
laborers are not paid the same per-diem wage, but only the 
same wage per labor unit: 

^ Ibid., pp. 383-89, passim. 
■ ^ Ibid., p. 391. 



466 VALUE AND DISTRIBUTION 

A laborer of high grade embodies in himself more units of labor 
than does an inferior one." 

The final unit of labor is the sacrifice entailed by a quantity of 
distinctly social labor.^ 

A social unit of labor .... is a composite unit consisting of 
some labor from every industrial group that the community con- 
tains.^-^ 

A minute would be a larger fraction of one man's day than of 
another's. It is accurate enough for our purpose, however, to say 
that the social labor is made up of a fixed fraction of a day's labor 
of every individual.^* 

Evidently it does not matter what precise quantity of 
this social labor is taken as the unit of measurement; but 
take now the case of a man who makes and upon the 
market sells a commodity: 

A commodity is actually measured for value on the basis of 
the social service that it renders All society, in the end, in- 
curs a marginal sacrifice that measures the valne The indi- 
vidual labor which made the commodity is the economic equivalent 
of the social labor that is induced by it and that measures its value.*' 

But how does a man actually go to work to exercise 
this inducing power over the social labor? Evidently he 
sells his product upon the market: 

If money is used in the transactions, and if the price of W and 
that of X are equal, it is because the last unit of supply of each 
commodity, as it is made over to the miniature society for con- 
sumption, imparts to society as a whole a uniform addition to its 

enjoyments Price is, then, an indication of the social cost of 

acquisition of different commodities.^' 

Thus are we able to know how much of each man's 
labor is necessary to constitute a unit of labor; and then 
we know that these amounts of labor will be equally paid — 
these funded equal units ; and how do we know this ? By 
the fact that in selling them upon the market, they will 
draw out equal quantities of social labor. But this means 
that the products sell for the same money price, and that 
the two quantities of labor are equal quantities by the mere 
fact of the equal market values of their products. And yet 
Clark has only a few pages back insisted that it will not do, 

^^ Clark, op. cit., p. 63. '^ Ibid., p. 170. ^^ Ibid., p. 397. 

"'Ibid., p. 378. ^Ibid., p. 396. -^ Ibid., p. 391. 



DISTRIBUTION BY VALUE PRODUCTIVITY 467 

in good logic, to make "the product .... the basis of 
measurement. If we say that whatever produces a unit of 
consumers' wealth is a unit of capital, we assert nothing 
by adding that, at any one time, all units of capital are 
equally paid." ^'^ 

We have now to recall that in Clark's view this resolu- 
tion of market value into some sort of underlying and con- 
trolling and determining homogeneity is absolutely essential 
to the funding of capital goods and of labor into value 
units, and likewise essential to the proof that in each fund 
the compensations tend to be — and normally are — the same 
for all of the units. That is to say, Clark rests the specific- 
productivity theory of distribution upon two bases, (i) that 
market values can be reduced to an ultimate homogeneity 
in terms of effective-utility units, it being for this purpose 
that the social-organism concept is invoked for service; 
(2) that all productive agents, on the one hand, and all 
productive instruments, on the other hand, are likewise 
subjected to the funding process, in such fashion that equal 
value productivity may be ascribed to the individual units 
of each fund, and this without appeal to the quantum of 
value productivity as determining or defining the unit. 

It is, indeed, possible that Clark has admitted here 
more than the necessities of the argument require; it is 
conceivable that neither of these intermediate steps is 
essential to the conclusion ; it may be that the specific pro- 
ductivity of the productive factors may be worked out, 
and distributive shares be found to be the precise cor- 
relatives and equivalents of specific productivity, and all this 
without appeal to any sort of homogeneity underlying and 
determining market values, and without any manner of 
recourse to the funding devices proposed. How, indeed, 
disprove it? 

And it is also forthwith to be admitted that no proof has 
yet been offered — or can later be adduced — that society is 
not an organism; but it is equally certain that no proof has 
yet been anywhere adduced that it is ; and it is worth noting 
that the sociologists themselves have long since mostly 

"Ibid., p. 374. 



468 VALUE AND DISTRIBUTION 

abandoned the doctrine. But none the less may the doc- 
trine be true, and fertile of more truth; this, however, is 
sheer matter of faith; and, as all propositions purely of 
faith are, it is at once unproved, unprovable, and undis- 
provable. And so likewise it may be true that the social 
organism has methods of funding labor and of funding 
capital that we wot not of; and — possibly enough — these 
capital and labor value funds — organically valued — are not 
derivative from the valuations organically placed upon the 
products. We can deny no part of this in any sense of 
thinking ourselves able to prove its falsity; to prove that 
water babies do not exist, we must, Kingsley tells us, do 
more than not see any water babies existing, we must see 
a water baby not existing. We can, then, do no more than 
to put in issue and to criticize the evidence or arguments, 
if any have been offered, in support of the position taken. 
Any criticism made or yet to be made must mostly confine 
itself to questioning the logical legitimacy of this estab- 
lishing of fundamental propositions purely by faith, and to 
a scrutiny of the logical tenability of the relations asserted 
or assumed between these dubiously authorized proposi- 
tions. 

But if, even faith- wise, these factor funds can be estab- 
lished upon any other than the repudiated basis that "what- 
ever produces a unit of consumers' wealth is a unit of 
capital," the explanation — if explanation it is — must appar- 
ently run substantially as follows : 

Just as "effective utility .... is measured by society 
as a whole," and as "the measurement of well-being, thus 
regarded in the abstract, is an occult but dominant fact in 
exchanges," and as "in this lies the significance of the 
phrase 'measure of effective utility,' .... it was upon 
the word 'social' that emphasis was laid;" precisely so, by 
some occult social-organism process, do we get an appraisal 
and a funding of capital goods and of labor, — a funding 
non-derivative from those volumes of value product ascribed 
and imputed to these productive factors, — and all this, also, 
in such fashion that both a mystical, occult, and marvelous 
parallelism and a precise proportionality are discoverable 
between the value of the funded unit and the value of its 
product. 

But even if this social-organism method of getting 
products and productive factors into abstract funds be 



DISTRIBUTION BY VALUE PRODUCTIVITY 469 

abandoned as, on the one hand, unproved, and as, on the 
other hand, unserviceable for its purpose unless logically 
abused, the productivity theory of distribution need not, be 
it repeated, thereby become untenable. It seems, indeed, 
that Clark has overestimated or wrongly located the diffi- 
culties of his problem; and it must be remembered that it 
is primarily this problem, and not Clark's solution of the 
problem, that is of interest to our investigation. Take it to 
be established, if we may, that market values will not 
reduce to pain jelly or to utility jelly, whether by the social- 
organism concept or by any other method ; the case of the 
productivity theory of distribution is not forthwith to be 
declared hopeless, if only it be true either, (i) that the 
funding expedient is not essential, or (2) that without any 
appeal to the hypothetical psychology of the social organ- 
ism, the market values of products and of factors may be 
made homogeneous on some sort of workable basis; and it 
need not matter whether this other basis be something dis- 
tinct from pain cost in the getting or from well-being 
significance in the using. 

It is, in any event, worthy of remark that the market 
values of products and the market values of factors are 
actually and patently homogeneous under the simple, every- 
day, and commonplace guise of market price, a homogeneity, 
that is to say, in terms of the money fact, a con- 
ventional standard admirably adapted, as expressive of 
homogeneous, undifferentiated purchasing power, for meet- 
ing all the requirements of this greatly desired homo- 
geneity. What, in fact, can capital as an abstract fund 
possibly be, if it be anything other than a market- value 
fund? 

But, even so, we are immediately driven back upon the 
problem of how to make use of this homogeneity in such 
wise as to help forward the problem in hand, which is, 
in part, precisely this of how to explain these very market 
values or hires upon these productive factors. For it must 
still remain true, as Clark has so well pointed out, that 
neither capital units nor labor units, no matter in what 
manner or how well funded, can logically be asserted to 
possess equal value productivity and so to be equally 
rewarded in value compensations, if all the while the units 
are explained and established as such, only by the fact that 
they produce equal values or get equal compensations. 



470 VALUE AND DISTRIBUTION 

We seem compelled, then, to adventure the problem 
under its other statement, how to explain the remunera- 
tions attributed by the market to the different, specific, con- 
crete factors and items employed and remunerated under 
the productive process? Is it possible to regard the 
remunerations as either normally or actually the precise 
equivalent of the productive contribution? How deter- 
mine this separate productivity for comparison with the 
remuneration? Is any method of isolation of factors 
possible? Or is all that can be said merely that the 
remuneration is the market value of the value-productivity 
contribution rather than the precise equivalent of the 
value contribution? To this aspect of the problem, which, 
after all, seems to be treated by Clark, we must now direct 
attention.^^ 

But precisely what is our problem? It is clear that we are 
not now interested in any issue as to whether cost causes 
value or value causes cost, or as to whether distributive 
shares are better regarded as primary or as secondary ; 
no denial is suggested that all productive instruments 
and agents are hired in view of the value products 
to be derived from them ; so far as this, at least, the value- 
productivity theory of distribution must be genially 
accepted ; nor is there question that the amount of value in 
the joint product of the factors is the equivalent, the 

^' "The specific productivity of labor fixes wages — that is the thesis 
to be supported in this volume" (p. 47). 

"We have said that the specific productivity of labor fixes wages ; 
and this means that pay conforms to the amount of product that is 
specifically imputable to any one unit of labor in a working force. 
This implies that the products of the different units are equal. In 
like manner, the specific productivity of capital fixes interest. The 
earnings of a dollar are what the dollar creates ; and this implies that in 
any one fund of capital, as it is described in terms of money, the 
products of all the different dollars are equal" (p. 49). 

"A laborer's income may seem to come to him from another man ; 
but in essence it is still the response that nature makes to his own 
labor — it is his own virtual product" (p. 53). 

"The income of each subgroup is now the value, not of a completed 
article, but of the one particular utility that it imparted to that article" 
(p. 54). 

"Paying interest is [sometimes?] buying the product of capital as 
paying wages is buying the product of labor. The power of capital to 
create product is, then, the basis of interest" (p. 135). 

"As value depends on final utility, so shares in distribution depend 
on final productivity" (p. 208), 



DISTRIBUTION BY VALUE PRODUCTIVITY 471 

source, and the intermediate determinant of the aggre- 
gate compensations distributed to these factors, it matter- 
ing not at all for present purposes how this total value to 
be distributed was caused or fixed; nor are we tempted to 
deny that each of these distributed compensations falls 
out in some general and approximate proportionality with 
the value increase contributed ; but rather are we con- 
cerned to determine whether any separate and specific 
productivity of the different co-operating productive fac- 
tors can be so isolated and distinguished that, actually or 
logically, the compensation may be declared to be the pre- 
cise equivalent of the productivity contribution. That is 
to say, what is the meaning and what the warrant of the 
assertion that out of the distribution of a joint product the 
different productive agents receive the precise equivalent 
of the value which they have contributed? Is it true that 
this precise productivity can be arrived at otherwise than 
by sheer reference and appeal to what they get? 

This is, in truth, our old problem of imputation, the 
problem already considered at length in an earlier chapter, 
how to distribute between the different co-operating factors 
not only all the value product which, if not so co-operat- 
ing, they might have produced, but, together with this, that 
increment or surplus of product which accrues as the very 
result, as it was the very purpose, of their co-operation. 

Assume that in isolated uses, or in other combinations, 
each of four productive facts, e. g., land, machines, wage- 
earners, and entrepreneur, could command 3 of recom- 
pense, and that when the four are brought together, their 
aggregate product is not 12 but 13 ; what distributive 
principle shall be invoked to apportion this surplus of i ? 
If the first of Clark's principles of imputation be accepted, 
namely, that "the amount that is taken from the crop when 
one cultivator is withdrawn from the force, measures the 
effective productivity of every laborer of like personal 
capacity," -^ this subtraction method will lead us to impute 
to each co-operating factor a specific productivity of 4, — 
and this despite the obvious fact that the joint product is 
not 16 but 13. 

Clark's second principle of imputation he does not him- 
self recognize to be a second, but only the repetition of the 

'^ Clark, op, cit,, p. 161. 



472 VALUE AND DISTRIBUTION 

first: "A similar test might have been made merely by 
adding a unit of labor, instead of taking one away." But 
if this principle be accepted we shall come into precisely 
the reverse difficulty. For if the proportions of factors in 
the original complex were the correct proportions — if, for 
the entrepreneur, the combination was the best combina- 
tion — no increase in any one factor alone could take place 
without its per-item productivity suffering. It follows that 
the method of "adding a unit of labor instead of taking 
one away" would distribute a product somewhat smaller 
than the actual product. 

But when it is known what any particular entrepreneur 
will, at the maximum, bid for the item in question to be 
used as part of his production complex, under his own 
direction, is it safe to attribute all of the increase in product 
to the new item? Is not this increase due rather to the 
mere "togetherness" of all of the co-operating facts? And 
is it not certain that other entrepreneurs in different cir- 
cumstances and of different abilities must have different 
maximum bids? And which one out of all these different 
productivity relationships gauges the specific productivity 
of the item in question? And does the market hire neces- 
sarily or probably exhaust all the value significance of the 
item to the successful bidder? And are not the cases where 
this is even approximately true confined to those produc- 
tive factors which are present in stocks? 

Substantially the same difficulties exist for all attempts 
at the isolation of productive factors; zones of indiffer- 
ence, in the sense of zones of isolation, are not to be found. 
If labor could somewhere be found supplied with no tools, 
or with valueless tools, and working upon valueless land, 
this would be labor suffering in compensation by reason 
of a limitation of product due to inadequacy of equipment. 
Where "the worn tool, the rickety engine, the unseaworthy 
ship .... is at the point of abandonment, the labor 
that uses it creates only wages;" this is true, but not full 
wages. It is therefore not true that "the amount of this 
product corresponds with and expresses the rate of 
general wages," ^^ and would not be true even if all labor- 
ers were alike in their relations either to equipment or to 
entrepreneurs. 

Nor — adapted to Clark's proposition — is there any zone 

*" Qark, op. cit., p. 97. 



DISTRIBUTION BY VALUE PRODUCTIVITY 473 

of indifference, or place of isolation, for the last or mar- 
ginal worker employed by any entrepreneur: 

It is this most sterile of the fields, openings, or opportunities for 
labor that we describe graphically as an outermost zone within 
which men produce only their wages. This is the zone of indiffer- 
ence from an employer's point of view, because, if he sets men 
working within this area, he must give them all that they produce 
as wages.'^ 

But, at the most, he needs do this only upon the assump- 
tion that he is the marginal employer, and upon the added 
assumptions, also, that the employees are all alike and that 
there is nothing peculiar in them or in him or in his land 
or other capital so that another employer may not push him 
to his highest possible bid. And even upon these assump- 
tions, there is no reason for supposing that even the last 
laborer is hired at precisely no gain; the employer may 
well have some unexhausted powers of supervision still 
left in him. And so, "if one employer offers to them less 
than by their productive powers [working for and under 
him] they are worth [to him]" there is no sufficient war- 
rant for the belief that "another will offer more, pro- 
vided competition is perfectly free and efficient." 

It is, then, a most dubious doctrine that the last laborer 
hired by the marginal employer is hired at no gain. Is 
there any good reason for supposing the extended super- 
vision of the employer to be non-productive? Why, then, 
does he exercise it? And if it be urged that because of 
limited command of capital some of the supervising abili- 
ties of the employer must, in any case, run to waste, it is 
to be replied that this argument recurs to an assumed 
peculiarity in the employer's situation, and so far aban- 
dons the attempt to explain the wages as reflecting the 
isolated, objective, value-producing power of the laborer. 
For note that the isolated and objective productivity in 
question is not to be established even upon the assump- 
tion that the production takes place upon marginal land 
only, or at the marginal powers of land, and with the co- 
operation of only marginal capital or the marginal powers 
of capital; it must also be assumed that the production is 
marginal in its relation to that marginal entrepreneur, and 
to the supervisory productive powers of that entrepreneur, 

'^ Clark, op, cit., p. no. 



474 VALUE AND DISTRIBUTION 

who can pay least for the labor and who, hiring it, pays at 
the same time all that he can. 

And now, assuming even this case of utmost payment — 
a payment leaving no least residue of rent or interest or 
personal compensation for the comfort of the employer — 
where all the produced increment goes to the laborers and 
goes as their distinct and unquestioned value productivity, 
it becomes so much the clearer that the wage outlays of the 
marginal employer are not fixed by him, but fixed for him ; 
he has no share in the results as fixed, except to the extent 
that as one item in the demand schedule, his demand has 
prevented that still lower wage which would have attended 
the throwing of these laborers over to the employment of 
some still less efficient and still weaker entrepreneur. But 
as in such case the wages must admittedly have been lower 
under this otherwise excluded employer, it follows that to 
our marginal employer, or to his entire productive complex 
as a unit, there must be ascribed some part of that pro- 
ductivity which Clark's analysis imputes to the laborer 
alone.^^ 

^^ Clark himself recognizes the importance of the productive com- 
plex — recognizes, that is, — as perhaps in view of his abstract-capital con- 
cept he logically must, — that each added dose of capital takes the form 
not of a quantum of machinery, or of land, or of cars, or of rails, etc., 
but of a complex or complement of co-operating factors, all applied under 
the guise of an item or dose of productive outlay, a unit sum of capital 
expense ; and this is admirable, only that it is assumed that, in concrete 
manifestation, this capital outlay must take the form and guise of 
material capital goods, rather than be applied in toto or in varying 
fractions to all lines of gainful expenditure, inclusive of labor, insur- 
ance, advertising, taxes, and what not : 

"Here, for instance, is a new locomotive. It has not been 
secured .... to take the place of one worn out, but is an additional 
engine, made necessary by an enlarged traffic. Is it a final increment 
of capital? .... It would be uneconomical to combine one poor 
engine with an equipment of good cars, good rails, etc. This comple- 
mentarity of producers' goods must always be considered 

The quality of the new engine is determined by that of the roadbed, the 
rails, the bridges, the cars, etc., with which it is used" (p. 248). 

But note that this really denies any distinguishable and specific 
productivity in the separate items of capital goods ; and note also that 
this same argument applies in principle to all combinations of capital 
with labor, or of capital goods with other capital goods, or of labor 
with other labor. 

"The competition for capital .... is an all-around struggle to 
get concrete things that are about to be. The capital of society has no 
existence till it is in the shape in which entrepreneurs use it. Till it is 
raw materials and tools for the manufacturer, merchandise for the 



DISTRIBUTION BY VALUE PRODUCTIVITY 475 

But we have now to notice a still more important and 
still more disastrous error in this method of analysis : 

The product that can be attributed to this second increment of 
labor is, of course, not all that it creates by the aid of the capital 
that the earlier division of zvorkcrs has surrendered to it; it is only 
what its presence adds to the product previously created.^' 

This is crucial; in point of fact, the new labor does not 
get all the increase ; the conditions of distribution are dis- 
turbed to the advantage of the capital ; wages ate suffering 
not merely from the fact of a diminishing production incre- 
ment, but also from the fact that out of this situation every 
unit of capital is deriving an increased income; that is to 
say, wages are suffering not only on the production side 
but on the distribution side. 

The fundamental error in all analysis of this sort — and 
the later economics is full of it — is traceable to the assump- 
tion that the marginal-utility analysis for the individual 
man can safely be carried over to society as a whole, and 
also that the method of computation supposedly valid for 
consumption goods can safely be applied to production 
goods disposed of under entrepreneur bidding: 

There is a commercial principle which causes the final or mar- 
ginal part of the supply to be strategic in its action on the value 
of the whole group. The value of the whole crop .... conforms 
to that of the marginal bushel. If there are marginal laborers, 
in the sense in which there are marginal quantities of wheat, cotton, 
iron, etc., then the final or marginal men are likewise in a strategic 
position; for their products set the standard of everyone's wages. 
.... The last increment in the supply of any commodity fixes the 
general price of it.'* 

retailer, vehicles for the carrier, etc., capital has no existence at 

all Bidding for capital, then, is bidding for something 

which .... will consist mainly in a change of quality of working 
implements" (p. 259). 

"The final increment of the capital of this railroad corporation is, 

in reality, a difference between two kinds of plants One of 

these is the railroad as it stands The other is the road built 

and equipped as it would have been if the resources had been one 
degree less" (p, 251). All this presents the social concept of capital 
rather than the competitive. 

"'Clark, op. cit., p. 176. 

^ Ibid., p. 90. 



476 VALUE AND DISTRIBUTION 

The difficulties are thus several in the way of .this 
method of solution of the distributive-imputation problem: 

1. With complementary production goods, no separate 
and specific significance, like that attached to consumption 
goods, can be ascribed to any one item. 

2. Changes in the relative supplies of co-operating 
goods work changes in the relative significance of all the 
different classes of the co-operating goods. 

(Propositions (i) and (2) would hold either in a Cru- 
soe or in a competitive economy.) 

3. In the competitive economy all possibility of ascrip- 
tion of a single productive significance to any productive 
item disappears ; the entrepreneurs being different in equip- 
ment and in degrees and kinds of skill, each item has as 
many different productive potentialities as there are differ- 
ent productive complexes. There can, therefore, be no one 
degree of productivity assignable as the specific produc- 
tivity of any particular item; and there is no warrant for 
supposing that the hire paid by the successfully bidding 
entrepreneur coincides with even his own appraisal of the 
prospective increased efficiency of his productive complex. 
The successful bidder pays at the minimum what someone 
else will pay; at the maximum, all that he can afford to 
pay; but that he is the successful bidder does not imply that 
he actually pays this maximum. 

4. Even were productive factors always present in 
stocks rather than — as generally — in concretely differing 
items, an entire competitive society would have no way 
of adding one marginal item of an increasing stock to a 
fixed and stable volume of complementary stocks ; even the 
individual does not commonly proceed in this way, but 
rather, as he enlarges his business unit, enlarges it in 
several directions at once. In competitive society, stocks 
and classes of production goods do not take one after 
another each its separate turn in the process of increase. ^^ 

"^ The precise relation of the marginal analysis to the specific value- 
productivity issue will be brought out in clearer definition by an account 
of a recent controversy between Professor Carver and Mr. J. B, 
Hobson : Hobson, "Marginal Units in the Theory of Distribution," 
Journal of Political Economy, September, 1904 ; Carver, "The Mar- 
ginal Theory of Distribution," Journal of Political Economy, March, 
1905 ; and Hobson, "The Marginal Theory of Distribution," Journal 
of Political Economy, September, 1905. 

In the preceding chapter some account was given of Hobson's 



DISTRIBUTION BY VALUE PRODUCTIVITY 477 

repudiation of the "dosing" method of analysis and of its purported 
bearing upon the relations of land rent to cost; and the opinion was 
there expressed that Hobson's criticism, as formulated in his "Distri- 
bution," falls appreciably short of seriously damaging the doctrine. 

In his later contribution to the discussion he adopts, as we shall 
see, a dosing analysis of his own, but attacks with great force and 
cogency the notion that under any dosing analysis, properly applied, 
is it possible to isolate and measure the separate productivity of any 
one of the different productive factors in the production process. 
Meanwhile, and especially after the reply of Professor Carver, other 
interesting issues are introduced, some of them possibly not strictly 
germane to the original question. Clark's doctrine is necessarily 
involved, though Qark himself takes no part in the discussion. 

Hobson denies that any entrepreneur, e. g., a farmer, deciding to 
employ a fifth laborer, can properly regard the resulting increase of 
product as representing or expressing the value productivity of this 
fifth man: 

1 . The work of this fifth man, being by assumption just like 
that of the other men, is equally productive, and is paid for at precisely 
the same rate, because of this precise equality in productivity ; if 
actually there is less than five-fourths of the old product, it is in part 
because the employment of the fifth man has lowered the value 
effectiveness of each of the other men. 

2. If the employer's managerial capacity leaves him yet able gain- 
fully to supervise another — a fifth — man, it must follow that a share 
of the increase in product is to be attributed to the utilization of a 
fraction of managerial ability which hitherto had run to waste. 

3. The doses applied are really not labor doses ; one does not 
make an increase in the labor solely, but an increase partly in labor, 
partly in capital, partly in land ; the dose is a land-labor-capital com- 
posite, and the increase in product is an increase which, if separately 
attributable to anything in the dose sort, must be imputed to this 
composite dose. 

Hobson also argues — perhaps unfortunately, at all events, unneces- 
sarily — that if the employer's payment were really the full equivalent 
of the productivity of the marginal man — if this marginal productivity 
were actually ascertainable — and if the productivity theorists were 
correct in asserting that this marginal productivity determines the 
wages and expresses and measures the value productivity of the 
wage-paid labor, it would thereupon follow, inasmuch as the other 
men are equally productive and equally paid, all getting precisely 
what they produce, that there could be no gain in the case for the 
entrepreneur. Hobson holds that it is precisely because the entrepre- 
neur gets a forced gain, something which, morally, does not belong to 
him, that he gets a profit ; and that Clark is justified in his view, that 
under the complete equilibrium of perfect competition, in "normal 
equilibrium," all entrepreneur profit would disappear ; but that there 
is, en the other hand, nothing in the competitive trend to bring 
about this equilibrium situation ; and that even were it to be estab- 
lished, the benefit of it would accrue not to wage-earners exclusively, 
but in part or entirely to consumers. 

Carver joins issue upon this question of profit; and taking profits 
to indicate what is left over "after the other shares are paid," he 
rightly proceeds to infer that competition can never cancel all entre- 



478 VALUE AND DISTRIBUTION 

preneur remunerations ; and he undertakes a detailed analysis to show 
that the entrepreneur, in employing more and more men, must finally 
come upon a man marginal for the purposes of gain — as, indeed, he 
must ; that what the entrepreneur can barely offer for this marginal 
man is tliereby established to be what this marginal man produces ; 
that the earlier men, as they get no more, are equally clearly to be 
regarded as producing no more ; that the excess in product from the 
earlier men over what they receive is really not their product at all, 
but is economically [and morally?] the product of him who gets it. 
Seemingly also, as with Clark, he gets it because he produced it, and 
is known to have produced it because he gets it. 

Now if one could know precisely the sense in which Hobson 
here uses the term "profit," something could be done, were it worth 
while for our purposes, toward an award of judgment upon the issue 
as joined. Certainly Carver is right upon the profit issue, as he inter- 
prets pro-fit. Certainly also Hobson is wrong in asserting that where, 
with four laborers, there is a product of 500, and with five laborers a 
product of only 100 more, "the competition of employers, driving 
down profits, will raise the wages to 120 . . . .if we assume .... 
[that] the competition of employers is as full and free as that of the 
laborers." 

On the other hand, Hobson is right in his view that a combination 
of laborers might command approximately the whole 600 as wages, — 
if the employer must take the five laborers or none. 

But, by the way, Clark, with his definition of profit, is also right 
in insisting that under the perfect competition of a static situation all 
profit would be canceled, since profit, as he uses the word, connotes 
merely that gain which is due to non-static conditions, or to incomplete 
competition, or to both. 

But such is not the issue that at present concerns us ; and such 
was not the issue which it was in Hobson's purpose to present. Nor, 
accurately speaking, does the question whether the work of the fifth 
man is of equal productivity with that of the others, greatly concern 
us; for what does the question really mean? Does it mean that it is 
as important to the entrepreneur to have one man more to go with the 
four as it was to have a fourth man to go with three? The question 
as thus stated answers itself, and there is no other question. There 
is no absolute productivity in this case or in any other case ; there 
is only productivity relative to the entrepreneur and to his situation. 
Hobson rightly insists that it is not separate ; nor is it intrinsic, or ~ 
independent, or substantive ; like all forms of utility or of service, it 
is a relation pure and simple. With a different entrepreneur it would 
be a diflferent thing, another relation ; with changes in this entre- 
preneur's situation or need, the significance of the instrument becomes 
a new and a different significance, simply because it is a mere rela- 
tion. Productivity can be such only in the sense of a contribution 
toward value creation under the particular terms and relations of the 
situation as it presents itself. The hire does not express the value- 
productivity contribution, but only the market value of this con- 
tribution. 

Hobson's substantial repetition of Qark's view that the dose is 
never one of labor alone, or of land, or of capital goods alone, but is 



DISTRIBUTION BY VALUE PRODUCTIVITY 479 

rather a land-labor-capital composite, a unit only in the sense of a 
unit complex, goes in one direction somewhat overfar, and in another 
direction not quite far enough. For surely with his last dollar or last 
thousand dollars of expense, the entrepreneur may hire nothing but 
labor or nothing but land, or nothing but capital g-oods ; but as surely, 
he may hire two of them or all three of them together. Nor is it 
true that there is, under any one situation or at any one time, one 
best technological combination for each and all entrepreneurs ; the 
different entrepreneurs being different in degree and kind of ability 
and of equipment, there is, in truth, never any one situation, but only 
various situations. One entrepreneur will apply his last dose of 
expense in one way, another in another, and these different ways may 
none of them be of the "composite" sort, or they may all be of 
this sort. 

But, as we have seen, the truth is not far away; the dose with 
each entrepreneur is a dose of outlay, a dose of purchasing power, a 
dose of competitive entrepreneur capital. Nowhere in economic theory 
more seriously perhaps than here has the traditional threefold classi- 
fication of productive factors exerted its influence to perplex and 
complicate and vitiate. 

It must be recognized here that, for the purposes of this 
problem, Clark's notion of abstract capital has led him to the enuncia- 
tion of what is substantially the truth. Without at all concurring in 
the dictum that "the idea that different parts of a product can be 
created by an entrepreneur at greater or less advantage to himself is 
fallacious," — this notion seeming to cut away from under Clark's feet 
the only valuable and true thing in his entire marginal-productivity 
analysis, — the central idea in the following must command entire 
approval : "To him it makes no difference whether he hires one agent 
or another or the two together since he gets the same result for the 
same outlay in all cases" (p. 365). 



CHAPTER XXIII 
THE LAWS OF RETURN 

To have established in economic theory, on the one 
hand, the distinction between long-time and short-time 
influences or, on the other hand, the distinction between 
the static and the dynamic in value problems is, irrespective 
of other and possibly greater grounds of obligation, to 
have placed the science under no small burden of debt. 
These are, however, really distinct services ; for though, 
at first impression, they appear to rank as merely different 
formulations of the same principle of distinction, this is 
seemingly neither a sympathetic nor a fair interpretation 
of either. 

Marshall's long-time reckoning points rather to such nor- 
mal or static equilibria as are eitSier reached or always in pro- 
cess of being reached within one general and established situ- 
ation of fundamental conditions ; the short-time reckoning 
allows for the minor perturbations and rearrangements 
which yet do not imply movements or tendencies in the direc- 
tion of radical, permanent, or fundamental change. Clark's 
even more important recognition of dynamic forces in 
economic life points, on the other hand, to radical and 
permanent modifications in the ultimate determinants of 
value — changes in those greater and ultimately directive 
forces which have been here somewhat awkwardly denomi- 
nated situation facts, as the basis of situation costs. 

It is, however, obvious, that the two lines of distinction 
are prone to coalesce, and that long-run influences and 
dynamic influences, while sufficiently distinct at the extreme, 
shade off into each other in intermediate cases. 

The long-run price is a normal price, a static equilibrium 
price as distinguished from those actual and unstable prices 
likely to obtain at any particular moment. That there 

480 



THE LAWS OF RETURN 481 

take place a merging of actual price into normal price 
requires the assumption both of a static society and of a 
long-run period. Nevertheless, the long-run computation 
is essentially one of an ideal, static, equilibrium price, the 
normal price, and is a concept far from new in the science. 
But up to the time of Clark, the distinction between funda- 
mental change and temporary flux had been only vaguely 
felt and loosely formulated.^ 

But, as has already been urged, that the distinction be- 
tween long-time and short-time influences is recognized as 
valid and illuminating, does not deny the cost relevancy of 
all those influences whose effect is believed to be transitory; 
the distinction rightly employed points merely to the tempo- 
rary nature of these costs, to the probability or the certainty 
that they will later be greater or smaller. It is, indeed, 
a strange doctrine that admits a cost as temporary only 
upon the assumption that it is permanent. The distinction 
really points the way to an investigation of the influences 
lying behind costs, and to the level of costs which it is 
the trend of these influences to establish. Mere seasonal 
and climatic changes, droughts and crop failures, pesti- 
lences, famines, whims and flurries of fashion, stand as 
static influences which render the long-time computation 

^ "Clearly there is the necessity in economic reasoning of regard- 
ing man as the subject and central point in economic science ; his 
environment as his opportunity ; his industrial product as his remun- 
eration ; his economic activity as his attempt to produce and distribute 
this produce along the lines of least resistance (sacrifice). Normal 
price is to be conceived as the line of least resistance not only for the 
buyers and sellers directly engaged, but also for the producers in 
other employments searching for those lines of activity affording the 
highest remunerations. Market prices are found to fluctuate in either 
direction about these normal or ideal prices and cannot, in the competi- 
tive adjustment of sacrifice, long or widely depart therefrom. In 
short, the normal price is that price at which no producer can, to 
his own thinking, better employ himself in some other line of produc- 
tion. Prices generally would stand at their normal, if no producer 
or consumer could, to his own thinking, advantageously changie his 
manner of economic action. But like the ocean, market values have 
no rest. Prices ripple and wave above or below their ideal level, as 
desires and appetites, opportunities and abilities, slowly or rapidly 
change in force." — Davenport, op. cit., sec. 91. 



482 VALUE AND DISTRIBUTION 

safer for purposes of understanding the larger laws of 
price. According to Marshall, "the value of a thing in the 
long run tends to measure its cost of production" ; not pre- 
cisely that the value of anything tends to be fixed or 
governed by its cost of production : "we might as 
reasonably dispute whether it is the upper or the lower 
blade of a pair of scissors that cuts a piece of paper ;" but, 
"as a general rule, the shorter the period which we are con- 
sidering, the greater must be the share of our attention 
which we give to the influence of demand on value; and the 
longer the period, the more important will be the influence 
of cost of production on value" :- all of which must be rec- 
ognized as valid, since, as we have seen, cost in one industry 
resolves itself mostly into the demands of other industries; 
only in the long run can these opportunity-cost influences 
make themselves adequately felt.^ 

That, as men acquire larger knowledge, strength, and 
technical skill, they become more effective producers of 

* Marshall, op. cit., pp . 428, 429 . 

' Perhaps this is as good a time as any other for working out some 
of the detail according to which these short-time influences affect the 
!.ong-time levels of things, and are finally absorbed into the long-time 
placidity. What results must commonly follow some price rise in the 
product of a particular line of industry, this rise taking place, it 
may be assumed, through a change in the habits of consumption ? 

There must first take place, in the short-time adjustment, an 
intensified utilization of all productive appliances in that industry, 
a recourse to some of the inferior powers of all the lands and of all 
the other productive agents therein employed, and at the same time 
an emphasized call upon other industries for instruments, labor, and 
materials. 

But no very great increase could be brought about in the value of 
those productive agents existing in the largie supplies implied by the 
mere fact of their being common to several different industries ; the 
larger effect would be felt by those agents having, for the time being 
at least^ an employment solely in the particular industry in question. 

But this "monopoly" advantage would not work itself out fully ; 
there are in the case important items of friction. Let it be assumed 
that these monopoly agents are competitively rented by owners to pro- 
ducers ; competition could hardly be so swift or so effective as, with 
rising prices of product, fully to express the advantages in the rising 
prices of the intermediate goods, thereby assessing these goods as 



THE LAWS OF RETURN 483 

wealth; that, with larger and larger supplies of any con- 
sumable good, there must go a smaller importance attach- 
ing to each successive unit of supply ; that, upon any given 
area of land, successive increments of product are obtain- 
able only on terms of increasing difficulty per unit of 
product; that, in many lines of production, the greater 
business has, in point of economies of production, the 
advantage over the smaller business — are propositions no 
one of which is markedly economic or technical in import, 
or of a nature to present overserious difficulty of compre- 
hension, or of a character to offer especial temptations to 
controversy. 

Not precisely so, however, for the same propositions as, 
after subjection to the necessities of economic analysis, 
reinterpretation for the purposes of economic investigation, 
and reformulation for the purposes of economic doctrine, 
they present themselves transformed and rearranged into 
the well-known "economic laws of return." 

Superficially, though not thereby incorrectly, regarded, 
the ordinary formulations of the law of diminishing return 
may be distributed under three heads : (i) A law of falling 

higher costs of production. To begin with, the machines could not be 
easily moved or sold, and competing producers could not step into 
possession of these monopoly appliances in their associated setting. 
In fact, the advantages do not attach to any monopoly agent separately 
and in isolation, but to appliances as members of a distinct producing 
group, with a pronounced interdependency between its various con- 
stituent members. Thus the problem of imputation within the group 
is, at least for the short-time adjustment, incapable of solution ; prac- 
tically speaking, the gains would appear as enhanced profits of manage- 
ment ; but this is crude in theory. 

And were the entrepreneur himself the owner of the different 
agents, the difficulty would be precisely the same difficulty ; he could 
not ascribe to any one agent the productive advantages enjoyed by the 
group. The monopoly goods might be — would be — essential to the 
situation, but so, also, would the situation as a whole be essential ; and 
the entrepreneur's own abilities in their relation to the rest of the 
situation would be equally essential. He could not expediently rent or 
sell the monopoly agents ; they would not be practically mobile ; there- 
fore no alternative application would be possible whereby to apportion 
their shares in the group product. The problem of complementarity 
is present in an aggravated form ; the product is simply and irreducibly 
a group product. 



484 VALUE AND DISTRIBUTION 

utility; (2) a law of falling product by weight and tale, a 
diminishing productivity in terms of concrete, objective, 
physical measures; (3) a law of falling value productivity. 

1. The first formulation asserts that with successive 
increases in the size of the productive complex, the return in 
utility falls short of proportional increase, — obviously a 
direct corollary from the law of satiation, if not, indeed, a 
mere repetition of it; thus a law of unquestionable validity 
for the purposes of the individual reckoning, and indirectly 
of significance for problems of Crusoe valuation; but 
equally clearly, a law only vaguely and only average-wise 
applicable to group-utility computations; and, in any case, 
a law relevant to market value only through the individual 
comparison of competing utilities. 

It is, however, here to be noted that, were all the dif- 
ferent agents and instruments of production keeping 
abreast in rapidity of increase, this fact of falling utility 
could have no necessary bearing upon exchange relations. 
But equally for one agent or for all agents taken collect- 
ively, the law of diminishing utility, of falling significance 
with relation to need, must hold, since it holds for all 
products, unless, indeed, it is offset by the fact of increasing 
productivity by weight and tale. 

2. The law of falling volume of concrete product, rela- 
tively to the enlarging productive complex, has evidently 
little significance for purposes of any individual competi- 
tive reckoning, otherwise than as the weight-and-tale aspect 
of the case transforms itself into a value-return outcome. 
And here, also, if all agents were manifesting the same 
rapidity of increase, it must follow, as will later more fully 
appear, that neither as volume nor as value need any law of 
diminishing return obtain. 

3. The third rendering of the law, as one of diminishing 
value return, is the only formulation having direct signifi- 
cance for any purposes of the competitive reckoning; and in 
this regard, also, it will later appear that no matter how 
clearly manifest the utility fall may conceivably be, there is 



THE LAWS OF RETURN 4^5 

no possibility in industry of a generally falling value return. 
So, upon the assumption of equality in the rates of increase 
among productive agents, there is possible neither a dimin- 
ishing weight-and-tale productivity nor a diminishing value 
productivity. 

Malthus and his successors long since made it clear 
enough that, looked at solely from the point of view of the 
land situation, the prospects of the human race are not 
encouraging. Increasing numbers of human beings must 
find the food problem progressively a more serious prob- 
lem; overcrowded land is the same thing as poor land; a 
larger and larger share of human energies must, then, with 
expanding population be applied to the solution of the food 
problem. The law of diminishing return for land is a 
fundamental fact in human affairs, a fixed, opaque, and 
brutal fact, full of bad omens and sad prophecies. 

And more than this ; it is evident that but for this law of 
diminishing return there could be no possibility of land 
shortage, or of that inevitable derivative of land shortage, 
rent. Thus, as with increasing population, there falls out, 
per capita, a smaller product to divide, there must also go 
to the landlords a larger and larger proportion of the more 
and more tragically inadequate total. The social classes 
disinherited of land are doomed to a double and compounded 
pressure of adversity; this law of diminishing return 
smites them with both edges of its sword. 

But the optimists also have their innings. All this 
would be true, other things remaining the same. But 
other things are not to remain the same; for if 
there is a law of diminishing return, there is also, it is 
said, a law of increasing return. If, with relative 
land famine, a larger share of the productive energies at 
human disposal must be applied to the land, it will also be 
true that, with improving methods and processes in manu- 
factures, we can spare for the land a larger share of our 
productive energies. Who knows that progress in one 



486 VALUE AND DISTRIBUTION 

direction may not more than make good the deficit in the 
other direction? 

And not this alone ; progress is possible and is probable, 
not only in the technique of non-agricultural production, 
but also in agricultural production itself. Progress of this 
very sort has indeed been rapid even without the increasing 
pressure of need. For what has been the meaning of the 
redistributions of population especially characterizing the 
last two centuries? The urban population has far out- 
stripped in rapidity of increase the agricultural population. 
The growth of the small city as against the country, and 
of the great city as against the small city is one of the 
most obtrusive facts of modern life; the new and agri- 
cultural countries like America and Australia, equally with 
the older countries, manifest these population redistribu- 
tions ; and on the other hand, in point of the degree of the 
tendency, the thickly populated countries of Europe fall 
not at all behind the sparsely and newly settled countries. 
City growth is general in the modern world. 

Why is it? It is fruitless to search for the fundamental 
explanation in the improvement of industrial processes. 
Only such men can work in manufacturing as can be 
spared from the processes of food production. As long 
as the food product from one man's labor sufficed for the 
food requirement of only one man, the entire population 
was compelled to occupy itself with agriculture; when 
now one man's labor will feed three men, two-thirds of the 
population may be urban. So also, the development of 
transportation serves for the most part to explain, not why 
so large a proportion of the population is now agricul- 
tural, but only the distribution of the non-agricultural 
population. To the extent solely that transportation has 
opened up more land or better grades of land to agri- 
cultural uses, or is itself to be ranked as one of the pro- 
cesses of agricultural production, is transportation respon- 
sible for the growth of non-agricultural employment. And 
precisely here it should be remarked that to the extent 



THE LAWS OF RETURN 487 

that, in the production of implements and appHances, 
manufacturing ,is itself an agricultural process, to pre- 
cisely this extent industrial improvement must have aided 
the relative growth of the urban population. 

Improving transportation, then, so far as it is not at the 
same time to be regarded as improving agriculture, has 
had its effect, not in emphasizing the growth of urban 
as against agricultural population, but in fostering the 
growth of the small city as against the village and of the 
great city as against the small city. 

Looked at from a more distinctly technological point of 
view, this truth would read that transportation has fostered 
the giant industry as over against many small competing 
units. 

Malthus in his formulation of the law of diminishing 
return for land was very plainly proceeding from a purely 
social and general point of view, rather than from the 
point of view of the -distinct and independent and com- 
petitive interest. That the law of increasing return, con- 
ceived as summing up the optimistic offsets in the social 
outlook, is equally a non-competitive formulation is equally 
clear. 

But, after all, what part, if any, of all this raw material 
of optimism is, accurately speaking, embraced within the 
economic law of increasing return? So far, all the 
"returns" suggested have sounded in terms of social service 
— of group or race utility, of quantum of productivity by 
measure of concrete item product, a purely weight-and- 
tale standard and basis of computation. And it is unques- 
tionable that, for certain purposes and from certain points 
of view, this interpretation of the laws of return is not 
merely a possible one, but is the sole interpretation either 
relevant or possible. But it is equally beyond question that, 
for certain other points of view and for certain other com- 
putations, measures of utility return at the one extreme 
and of value return at the other extreme are much more to 



488 VALUE AND DISTRIBUTION 

the point. For most purposes in the competitive reckon- 
ing only laws of value return can have significance. 

But does the law of increasing return, accurately- 
formulated, have exclusive reference to such industrial 
effects as are idue to the development of the human fac- 
tor in production, whether in physical efficiency, in native 
mental power, in zeal and persistency of effort, in scientific 
knowledge, in control of technological methods and appli- 
ances, or, finally, in the advantages and methods of "team 
play" as exhibited in higher forms of organization? That 
is to say, does the law merely affirm that the better the pro- 
ducer the larger the aggregate social product, precisely as 
in the Malthusian reasoning it is asserted that the less 
adequate in quantity or quality the land the smaller the 
return to human activity applied to the land? 

But, so interpreted, the law of increasing return applies, 
equally with the law of diminishing return, to agriculture; 
and the law of diminishing return applies, equally with 
increasing return, to manufacturing. Agriculture bene- 
fits by good appliances, by good transportation, and by 
zeal and care and intelligence in supervision and in organi- 
zation; manufacturing suffers by every inadequacy of 
equipment. 

Or does the law of increasing return assert that some- 
how, as manufacturing in the aggregate comes to employ 
more men (or more capital?), it makes more than pro- 
portionate increase in its weight-and-tale productivity? 
So understood — and irrespective of the effect of concentra- 
tion into larger and larger productive units — there is only 
so much in the doctrine as may be implied through the 
division and specialization of employment between indus- 
tries ; and here again, the principle applies unequally to 
different manufacturing industries, and while perhaps 
applying more noticeably to manufactures as a whole than 
to agriculture as a whole, applies to some branches of agri- 
culture in higher degree than to some branches of manu- 
facture. 



THE LAWS OF RETURN 489 

Or does the law in question assert that, with organiza- 
tion into larger production units, there results an increase 
in the weight-and-tale productivity of manufacturing 
industries in the aggregate? Here again, the advocates of 
la grande culture in England or among the bonanza farm- 
ers of the Northwest would insist that the law is also in 
degree an agricultural law.* 

Or is the law to the effect that, among competing units 
of production, the relatively large competitor has the rela- 
tively large weight-and-tale product? 

Or does the law run that among competing producers 
the relatively large units get better results in value product 
in proportion to the value outlays of production? 

And if by chance the law be interpreted in this com- 
petitive and value sense, is it to be taken to compare the 
average entrepreneur costs and average value produc- 
tivity of different units of production, or rather only their 
marginal value costs and their marginal value productivity? 

And this leads us to the question whether the law is 
framed as primarily of service in the determination of 
comparative profits and thereby as explaining the trend 

* Carver makes the following especially illuminating observation : 
"Confusion has sometimes resulted from a failure to distinguish the 
law of diminishing return from a somewhat similar law relating to 
the comparative economy of large- and small-scale production. It is, 
for example, sometimes stated that manufacturing is carried on under 
the law of increasing return, because a large factory can be run more 
economically and turn out product at a lower cost, than can a small 
one. But this is quite different from saying that a large factory can 
be run more economically than a small one on a given piece of land, 
or that it would not be necessary to use more land in connection with 

a large factory than with a small one of the same kind 

Among the various questions on which the manager of such a unit has 
to determine are the two following : ( i ) What is the best proportion 
in which to combine the various factors; (2) What is the best size 
for the whole business unit? The law of diminishing return has to 
do with only the former of these questions. That is to say, it 
relates to the varying productivity of an industrial unit when the 
factors are combined in varying proportions. [Concrete productivity? 
Value productivity?] On the other hand the law which relates to the 
comparative productivity of large- and small-scale production has to do 
primarily with the size of the unit." — The Distribution of Wealth, 
pp. 64, 65. 



490 VALUE AND DISTRIBUTION 

of industry toward the giant organization, or rather as 
explaining the bearing of giant organization upon market 
prices, and as explaining also the relation of these market 
prices to the productivity and the remunerations of the 
various productive agents. 

At any rate, the law can hardly be one of increasing 
proportional value productivity with increasing size of the 
productive unit, unless the law is taken to apply not to 
industries taken as a group aggregate, but to the competing 
industries inside the group ; for it may readily be true that 
the organization of any industry into the giant form should 
so reduce its costs that even with an expanding product by 
weight and tale, the aggregate value of the product should 
be a diminished one; and this might hold of manufactures 
as a whole as over against agriculture as a whole. 

Nor can the law rightly mean that greater value pro- 
ductiveness goes, per unit of expense, with increasing size. 
This is not necessarily true ; it is safe to assert only that to 
the greater industrial unit goes the relatively greater profit. 
For, where the elasticity of consumption is not great, and 
where competition among rival businesses is close, lower 
prices may obtain to an extent to bring a lower value pro- 
ductiveness for each, and a generally lower average of 
profits; and yet it may remain true that the greater units 
suffer least, that to the larger units there accrues a relative 
advantage. 

Or does the law run only to the effect that, in 
industries of heavy investment and heavy fixed charges, 
the extra cost of successive items of product is 
less than proportional to the increase of product, 
a law which, as of necessity, says nothing as to 
the aggregate increase in value going with the increase 
of product, but leaves it possible to be assumed that the 
entrepreneur will limit his product at the point where the 
extra expense of production, together with the falling 
prices upon the original output, balances the extra value 
represented in the added items? 



THE LAWS OF RETURN 49 1 

If this last is the significance of the law, a danger 
signal is called for; monopoly production would, it is true, 
follow the policy outHned; but with competing producers 
really competing, there is, as trust promoters and trust 
apologists have correctly urged, and as the influences 
behind railroad pooling fully illustrate, no such assurance; 
competition may bring prices down nearly or quite to the 
level of the costs of the extra product, practically canceling 
the earning power of the fixed-charge portion of the 
investment.^ 

It appears, then, that to find what there really is in this 
law of increasing return it is necessary rigidly to exclude 
all influences of improving technique, developing human 
beings, and all influences ranking under increasing demand 
for products, and to confine ourselves to the sheer com- 
petitive advantages of combination and concentration, 
(i) for increased weight-and-tale product per unit of 
expense, (2) for increased value product per unit of 
expense. Evidently (i) may be found without (2), though 
(2) is impossible in the absence of (i). 

Note that no a-priori reason exists why this law of 
increasing return might not characterize all industries. If 
it does not, or if it does so unequally, the reason must be 
sought in the peculiar nature of the industries in question. 
The law may fail to hold with certain industries, because 
by the nature of the instruments which they employ, or of 
the processes required, e. g., as with land, the business unit 
cannot greatly increase, the giant organization being 
impracticable; or the market may be of so limited powers 
of consumption as to render giant organization impossible. 

At any rate, the law is not one referring by necessity 
to the interdependence of factors or to the constitution of 
the business unit in respect to the factors included. The 
law might hold for one industry almost exclusively labor- 
employing, or land-employing, or machine-employing. For 

• Cf. Marshall, op. cit., pp. 448, 449 . 



49^ VALUE AND DISTRIBUTION 

the purposes of the law more labor may apply itself to 
labor as well as to land or capital; or the advantage of 
increasing size may be obtained by adding more capital 
goods to an existing capital undertaking, or by adding 
more acres of land to the acres already employed. 

The law of diminishing return is perhaps even more 
difficult of making precise and definite. There is the same 
tendency to oscillate between value formulations or impli- 
cations and the weight-and-tale type of concept. Malthus, 
as we have seen, gave to the doctrine a distinctly social 
significance, and thereby of necessity a definitely weight- 
and-tale type of formulation. 

But earlier than the time of Malthus' formulation of 
the law in terms of population and subsistence, the problem 
of agricultural returns had received thoughtful and 
authoritative consideration, wherein the two aspects of the 
law so hopelessly confused in later discussion attained 
some measure of vague differentiation. 

Cantillon, for example, though regarding the prob- 
lem as, on the outlay side, one of labor units of investment, 
had yet, in prophetic anticipation of Physiocratic doctrine, 
rendered over this labor into terms of value cost according 
to the quantum of subsistence material, land-productive 
power, embodied in these units. It is, however, true that 
the significance of labor in the case is for the most part 
regarded as measurable in units of time. 

But with Quesnay the talk is, on the cost side, wholly 
of labor and capital conceived as reduced to an entre- 
preneur common denominator, and as aggregated under 
the head of "depense," a competitive formulation and a 
value rendering; at the same time, the return, the produit 
net, is conceived as a value surplus over the invested capital 
outlay. 

Malthus' doctrine was evidently not directed to the elu- 
cidation of the law of rent, and was formulated in advance 
of any well-considered and widely accepted doctrine upon 



THE LAWS OF RETURN 493 

the land-rent problem. Mostly, perhaps, because the dis- 
cussion was innocent of rental connotations, the formula- 
tion was consistent and free from confusion. But in later 
discussion, and especially since there has appeared to 
exist a close relation between diminishing return and the 
rent-cost issue, there has prevailed an almost uninterrupted 
confusion." 

But all of this should become clearer after a catalogue 
of the different concepts of diminishing returns has been 
attempted and an analysis of these concepts completed. 

I. Based upon the law of satiety applicable to any stock 
of consumption goods in the hands of any single indi- 

° Proof of this assertion is in the nature of the case almost 
impossible of giving; some random citations out of the latest of 
economic literature are, however, offered : 

"The law of diminishing returns is simply a part of the general 
observation that the product [concrete product? value product?] of 
any given piece of land does not .... bear a constant ratio to the 
amount of labor [time sum? pain sum? value sum?] and capital [how 
are labor and capital aggregated?] used in producing it." — Carver, 
Distribution, p. 55. 

"Though large applications of labor and capital may continue to 
produce larger crops, the crops will not be as large in proportion to the 
labor and capital." — Ibid., p. 56. [The weight-and-tale aspect of the 
crop is here compared with labor somehow measured, plus capital of 
some sort or other somehow reduced to homogeneity with the labor.] 

And on pages 58, 59, and 60 of the same work the tables given 
make comparisons between "days' labor with man and tools" and 
bushels of product, and state the results in "bushels per day's labor." 

But on page 60 the value formulation of the law is presented : 
"Whenever you find a competent farmer devoting a part of his labor 
and capital [how united?] to the growing of any crop on more than 
one grade of land, you may be sure that he thinks it pays better to 
do so than to concentrate all his energies on his best land." 

However, later on the same page the discussion lapses into the 
other concept : "We shall find by comparing the two tables, that if 
he had only twenty days' labor to use, he could get more bushels by 
concentrating them all on his best field" [time vs. bushels] . 

"The law of diminishing returns relates to the amount [ ?] which 
can be produced on a given piece of land [area?] by varying amounts 

of labor and capital [ ?] After a certain point, the amount 

that can be produced on any given piece of land does not increase in 
proportion to the labor and capital used." — Ibid., pp. 63, 64. 

Entirely justifiably Carver takes issue with Bullock (cf. "The 
Variation of Productive Forces," Quarterly Journal of Economics, 
August, 1902), in regarding the law of diminishing returns as applicable 



494 



VALUE AND DISTRIBUTION 



vidual, and upon the derived concept of marginal utility, 
there has been, as we have already seen, somehow deduced 

not only to land but to all forms of combinations of productive factors ; 
Carver says upon this point : "A complete formula which should show 
every possible application of this extension of the law of diminishing 
returns would require a separate term for each and every kind of 

labor, land, and capital The following simple formula will 

have to suffice : 

> c^ ►« 

SB!? O- 






If 



X with Y will produce P 



Then X with aY will produce 



And aX with aY will produce 



more than aP (increasing returns) 
less than aP (diminishing returns) 

(Increasing economy of 
more than aP \ large - scale produc- 
tion) 
(Diminishing economy 
less than aP \ of large-scale produc- 
tion) 

"It is assumed that a is a positive quantity greater than i" 
(p. 66). But a of what? and I of what? We seem to meet here 
land as superficies, plus labor and land somehow aggregated, and the 
whole set over against weight-and-tale product. So on pages go 
and 9 1 : 

"There is another factor .... with which we must reckon, and 
to which we may give the name of management. An industrial estab- 
lishment is a combination of various factors under one management, 
and the question of large- or small-scale production becomes, there- 
fore, a question of the proportion between the factor called manage- 
ment, on the one hand, and all the other factors, on the other. [The] 
formula .... which was given as an expression for the law of 
increasing or decreasing economy of large-scale production, may be 
modified as follows, to take account of this new factor: 



If M with X with Y with Z will produce P 

( (Increasing economy 
more than aP -j of large-scale pro- 
Then M with aX with aY with aZ ) ( duction) 

will produce ) ( (Decreasing econo- 

less than aP \ my of large-scale 

( production;. " 

The following quotations illustrate, within the limits of the para- 



THE LAWS OF RETURN 495 

a law of falling market price in society for any increas- 
ing supply of consumption goods. The haziness of reason- 
graph quoted, a shift from one point of view to the other ; questions 
of "pay" are value questions, not "amount" questions: 

"An increase in the amount of labor on a given amount of land 
will never, in any normal case, increase the product as much as the 
labor is increased. That is to say, except on the frontier, it always 
pays to cultivate land beyond the point where diminishing returns 
begin, if it pays to cultivate it at all, but it never pays to cultivate it 
up to the point where an increase in the labor would yield no increase 
in the gross product" (p. 73). "Similarly .... an increase in the 
amount of land with such given amount of labor will always increase 
the gross product. But since so little land is never profitably used in 
connection with a given amount of labor as to produce the maximum 
per unit of land, it follows that, in any normal case, an increase in the 
land with such given amount of labor will not increase the product as 
much as the land is increased" (p. 74). 

In other cases the argument goes clearly over to the value-return 
point of view; for evidently there can be no talk of substituting one 
factor for another, or of the proper proportions of the different factors 
in combination, excepting upon the value-return basis : 

"Where each factor costs something it always pays to combine 
them in such proportions that if any one or two of them were increased 
it would increase the product, but not so much as the variable factor, 

or factors, were increased But what is the most profitable 

proportion in which to combine the various factors of production? 

As already suggested, this depends upon their relative cost 

There are, for example, several ways to grow a hundred bushels of 
corn. One is to use much labor with little land, making the land pro- 
duce a heavy crop, but getting a small product per unit of labor. 
Another is to use little labor with much land but enabling the labor 

to produce a larger amount per unit Where land is dear 

and labor cheap, the former is the better method ; but where land is 

cheap and labor dear, the latter method is better The 

question which is the better method depends upon the relative cost of 
the two factors" (pp. 76, 78). 

Seager's formal statement of the law reads as one of labor and 
capital set over against concrete product : "After a certain point has 
been passed in the cultivation of an acre of land or the exploitation 
of a mine, increased applications of labor and capital yield less than 

proportionate returns in product Possible improvement in 

the method of cultivation beyond the roughest scratching over of the 
soil may and probably will yield more than proportionate returns in the 
wheat crop, but after a certain point has been passed, all experience 
confirms the law that further improvements aiiford less than propor- 
tionate retarns."— —Introduction, pp. 114, 115. But the more accurate 
rendering is elsewhere, but less formally, presented : "The final 'doses' 
of labor and capital he applies to his land may be just paid for in the 
price he gets for the additional produce that results from them. It is 
to his interest to continue his cultivation so long as it is remunerative. 
But all earlier applications of labor and capital will be more than 



496 VALUE AND DISTRIBUTION 

ing bv which has been achieved this affihation of demand 
price upon marginal utiHty, and of falling individual 
demand price upon falling personal marginal utility, and 
of market price upon some assumed social marginal utility, 
need not here again concern us. But the further step by 
which have been worked out a falling marginal significance 
and a falling marginal demand price for increasing sup- 
plies of productive instruments, requires especial attention 
at this point. 

The law of falling price with increasing supplies of con- 
sumption goods holds in its usual formulation only because 
the demand schedule with any one line of consumption 
goods may be taken as a fixed fact; new supplies can be 

covered by the price received for what they added to the product" 
(p. 117). 

Seligman : "In the case of agricultural land .... additional 
doses of capital and labor will yield a relatively smaller produce." — 
Principles, p. 306. "Whenever double the amount of exertion yields 
more than double the amount of output, we are in presence of the 
law of increasing returns or decreasing cost. When double the exer- 
tion just doubles the output, we have the law of constant returns or 
constant cost" (p. 250). 

Gide {Principes d'Economie Politique, sixieme ed., p. 132) states 
in one formulation both laws, that of produce return and that of value 
return, seemingly upon the assumption that they are really one and 
that it does not particularly matter whether quantity of labor be 
compared with value of product or quantity of product be compared 
with value of labor : "Sans doute il n'est peut-etre pas une seule terre 
dont I'agriculteur ne put, a la rigeur, accroitre le rendement : seulement, 
passe un certain stage de I'industrie agricole, il ne peut le faire qu'au 
prix d'un travail qui va croissant, en sorte qu'il arrive un moment ou 
I'efifort a exercer pour forcer le rendement serait hors de proportion 
avec le resultat. Soit un hectare de terre qui produit 15 hectolitres de 

ble Supposons que ces 15 hect. de ble representent 100 

journees de travail ou, si Ton prefere s'exprimer de la sorte, repre- 
sentent 300 francs de frais ; la proposition revient a dire que pour 
faire produire a cette terre deux fois plus de ble, soit 30 hect., il 
faudra depenser phis de 200 journees de travail ou plus de 200 francs 
de frais. Pour doubler le produit, il faudra peut-etre tripler, peut-etre 
quadrupler, peut-etre meme decupler le travail et les frais. C'est la 
ce qu'on appelle la loi du rendement nonproportional (nonproportionel 
au travail)." 

Flux's rendering of the law, while ambiguous for the purposes in 
hand, may, it must be admitted, easily be interpreted into accuracy : 



THE LAWS OF RETURN 497 

marketed only on terms of such price as will tap lower 
levels of price-pa3'ing disposition. If, however, the increase 
is one of a productive agent, there results a new and larger 
volume of value product and a rearrangement of the condi- 
tions of demand ; the new level of remuneration is to be 
worked out only as the outcome of a new problem of dis- 
tribution, upon the assumption of a new volume of value 
product to be imputed to a new and a rearranged and read- 
justed set of productive agents. So, then, with popula- 
tion increasing relatively to the other factors, there may be 
expected a fall in the level of wages, but this only by virtue 
of two influences, (i) a less than proportional increase in 
the product to be distributed, (2) less favorable terms of 
distribution for labor relatively to the other agents con- 
cerned in the technological process. The rule and the rea- 

"Increase of labor and capital devoted to the cultivation of a given 
piece of land will, at any rate after a certain degree of thoroughness 
of cultivation is exceeded, result in increased product, indeed, but that 
increase will be in a constantly decreasing proportion to the labor and 
capital to which it is due." — Economic Principles, p. 98. 

In the main and in general purport Fetter's formulation sounds 
consistently as one of value expenditure over against value return ; 
as, e. g. : "Economic diminishing return always has reference to 
value. If a particular kind and amount of a certain material is used 
in varying combinations with other agents, the value of the added 
product will not always be in the same proportion to the value of the 
added agent. The bridge-builder must consider not only what the 
. added material will add to strength, but what it will cost, and whether 
the result will justify the expense. So the economic problem of 
diminishing returns is more complicated than the mechanical one" 
{Principles, p. 64). But it is none the less true that the discussion is 
always near to the point of dropping into utility calculations ; as, for 
example, on page 61 : "The phrase 'diminishingi returns of industrial 
agents,' is the expression of the fact that there is an elastic limit to 
the utility any indirect good can afford within a given time." And 
again upon page 71 : "Diminishing return of indirect agents is a 
special case of the universal law of the diminishing utility of goods. 
Diminishing return has to do with indirect goods, while diminishing 
gratification has to do with direct or consumption goods. They are two 

species or aspects of the same general principle Any indirect 

agent, added to a fixed amount of other ag(ents with which it is techni- 
cally used, is credited with a diminished utility, just as an additional 
supply of enjoyable goods coming to meet a fixed demand, falls in 
value." 



498 VALUE AND DISTRIBUTION 

soning valid for increasing supplies of consumption goods 
will not hold for production goods.'' 

II. The Malthusian rendering of the law of diminish- 
ing returns has no concern with any principle of rising or 
falling utility or of rising or falling price, as supplies of 
consumption goods may either expand or contract. The 
assertion is merely that successive increments of labor 
applied to a fixed area of land must be remunerated by a 
less than proportional increase in objective, concrete, 
material output: 

This law is purely a derivative from the technology of 
agriculture; if economic at all, it is only borrowedly so; 
it conceives labor roughly in terms of time, or, possibly, 
in units of effort or stress or pain, but certainly not in 
terms of value measures or of wage outlays. Nor is the 
product thought of as in any sense a value aggregate; nor 
are possible distributive bearings relevant to the distinctly 
and exclusively social significance of the point of view. 
The tacit assumptions are ( i ) that land is present in unchan- 
ging quantities and qualities; (2) that labor, unmodified in 
quality but increasing in quantity, must apply itself to the 
fixed land situation. The law signifies merely that in agri- 
cultural production different productive factors are required ; 
with sparse population some of these factors are gratuitously 
present ; with denser population production comes to depend 
more and more upon the non-gratuitous factors, that is, 
upon labor directly or upon stored-up wealth; all of which 
sums up to mean that for all social purposes crowded land 
is synonymous with poor land. 

III. That successive increments of labor and capital, 
applied to a fixed area of land, must be rewarded by, a less 
than- proportionate increase in zveight-and-tale product: 

'' As will later be pointed out the prevailing classification of 
productive factors is a most dubious one, even for dynamic problems ; 
and particularly is it unsafe to assume that labor may be treated 
in the lump or aggregate, without distinction of grades or occupations. 
But for present purposes these considerations are, perhaps, not 
especially significant. 



THE LAWS OF RETURN 499 

This is a law midway in transition from a social and 
material computation to a competitive and value computa- 
tion. Precisely how labor and capital are to be aggregated, 
whether upon a value basis, or upon the notion simply that 
capital is merely indirect labor, and how, if the value 
aspect of the labor and capital is accepted, they are con- 
ceived to be related to the land as mere area, and how labor 
value and capital value and land value are competitively 
relevant to weight-and-tale product, are evidently past know- 
ing. The law is one of muddled thinking. 

IV. That zvith an increasing money quantum of costs 
upon a fixed area of land goes a weight-and-tale product 
less than proportional to the increasing money costs: 

This law is manifestly one of more nearly completed 
transition to a value basis. It assumes the land area as 
fixed and, together with this, a fixed entrepreneur activity 
of supervision ; and it conceives the application of pro- 
ductive energies in terms of value outlay; and it abandons 
any distinction, for its purpose, between capital outlays for 
labor, and capital outlays for instrumental goods ; but it is 
not at all clear that either the fixed land area or the fixed 
entrepreneur activity has been carried over into a value 
rendering; the product remains a non- value fact, though it 
would be an easy step to carry this over into the value 
denominator, by assuming that the same price level holds 
for the new product as for the old.^ 

V. That upon a fixed area of land, an increasing 
expense outlay, with fixed entrepreneur activity of super- 

^ In this general field of analysis, by far the best work known to 
the present writer is that of Professor Commons in his Distribution of 
Wealth (Macmillan, 1893). The following passages especially deserve 
citation in this connection : 

"The land-owner does not produce goods for his own consumption, 
but for sale. Hence his land is valuable to him in proportion to the 

exchange value of the product A given area of land does 

not usually afford room for the production of so large a supply of 
gioods as to affect the general supply of those goods. The prices of 
products are determined by the general forces of society, operating 
throughout the world So far, then, as the given area is con- 
cerned, the price per unit of its product changes so little that we may 



500 VALUE AND DISTRIBUTION 

vision, is not remunerated with a proportional increase of 
value product: 

Here the adoption of value outlay as over against value 
product is approximately complete; nevertheless, the land 
fact and the supervision fact are not fully assimilated to 
the value reckoning. Capital is conceived as invested 
indifferently in labor or in instrument hire, but not in land 
hire; that is, the constitution of the production complex 
is labor value-|-capital value-f-land area-|-entrepreneur ac- 
tivity; these, as combined in the productive process, give 
somehow a value product. 

VI. That with a fixed investment in land, an entrepre- 
neur cannot, with successive increments of capital outlay, 
obtain increases of product proportional in value to the 
increase in capital expense: 

Here all factors in the production complex, with the 
exception of entrepreneur activity of supervision, are 
reduced to the capital-value denominator. But both land 
value and entrepreneur activity are conceived as constants. 

VH. That with fixed and valued investment in land, 
and with fixed and valued entrepreneur activity in pro- 
duction, successive additions of expense for labor or for 
instrumental goods or for both are remunerated by less 
than proportional additions to the value product: 

regard it as fixed and constant. Tiie total value of its product varies, 
therefore, exactly in proportion to the quantity of the product, and as 
this is subject to the law of diminishing returns, so also must be its 
value" (p. 138). 

"The reason why average returns are not as high .... is 
because successive increments yield a less return than would the single 
increment if it were the only one invested. In other words, the concep- 
tion of diminishing returns has reference to a possible set of circum- 
stances showing what would occur under other conditions, when 

investments might be increased or diminished Where twenty 

laborers are employed with an aggregate product of 3,200 bushels, and 
an average product of 160 bushels, if we should ascribe to the first ten 
laborers a product of 200 bushels each, to the next two, a product of 
140 bushels each, and to the last five, 100 bushels each .... this is 
not the actual product of the different laborers, since they all possess 
equal efficiency ; but from an analogy with what they tvould produce 
under the different conditions .... we are justified in dividing up 
the aggregate product in this manner" (pp. 152, 153). 



THE LAWS OF RETURN 5°! 

Subjected to reinterpretation, this appears to mean no 
more than if vahie-wise you double only a part of your 
outlays of production, you will fall more or less short of 
doubling- the value output, a proposition not seriously 
questionable as doctrine and not especially fertile of new 
truth. There is also to be noted, in passing, the assumption 
made — an assumption common to practically all discussion 
in this connection — that the costs imposed upon entrepre- 
neur capital in the productive process are actually and 
necessarily restricted to four directions of expenditure, 
land hire, capital hire, labor hire, and supervision charge. 

VIII. A law of rising costs of production generally and 
of rising market prices for land products, with increasing 
population: 

It is assumed that with increasing population there 
must go an increasing land scarcity; and it is assumed, 
in addition, that, because of the relatively inelastic quality 
of this increased consumption need, production must take 
place at a high level of entrepreneur cost, and that this 
production will cease only at the point where the neces- 
sary cost outweighs the possible price; and that in the 
process of adjusting and distributing the outlays, the 
increased selling-price of the product will mostly go for the 
services of these necessary agents which, relatively to the 
increasing demand, are assumed to have become relatively 
scarce, e. g., the land. 

That is to say, this formulation of the law conceives of 
all entrepreneur debits against production as equally costs 
of production under the value measure; in other words, it 
reduces land hires and all other hires, together with the 
entrepreneur's own necessary remuneration, to the value 
statement as supply-limiting resistances offered to entre- 
preneur activity as applied to this particular line of produc- 
tion. 

But this formulation, while not open to attack for inaccu- 
racy or for lack of business actuality, is evidently a formu- 
lation which assumes, as fundamental to the entrepreneur 



502 VALUE AND DISTRIBUTION 

computation, an existing system of value costs, and, among 
other things, assumes such action of distributive forces as 
have attributed a high rent, a value hire, to the better 
qualities of land, and this by very virtue of the fact that 
these better qualities of land excuse the producer from 
high alternative expenses for other productive agents. 
That is to say, this law reports the results of an economic 
analysis instead of contributing to such an analysis; it is 
a law summarizing distributive results rather than a law of 
production making toward an ultimate solution of the value 
problem ; in last analysis, it is a law of value determination 
only in so far as it points to the underlying and funda- 
mental conditions determinative of entrepreneur activity, 
entrepreneur costs, and entrepreneur value adjustments. 
The relative scarcity of those agents requisite for certain 
products is the ultimate explanation — on the cost side — for 
the relatively high exchange position of those products. 
These higi; values are, in point of process, reached and 
adjusted as the outcome of the entrepreneur system of 
production; in the course of the process, as means to the 
result, and as motived by the result, there come to be 
imputed to the scarce agents, under entrepreneur bidding, 
their high rental and sale values. 

IX, That with increasing population there go in agri- 
culture increasingly large value outlays by the entrepre- 
neur, relatively to the value product: 

But if this is true, it must be true only as based upon 
some distributive analysis not contained in the law and not 
in terms appealed to by the law. On the face of it, there 
appears to be no reason why, with increasing population, 
agriculture should become less profitable to the entrepre- 
neur cultivator. If his costs, rent and other, become in the 
aggregate higher, so might also the value of his products be 
higher : or his wage outlays might be lower, though this 
again, if true, must deduce its warrant from some source 
outside the law, — by appeal, perhaps, to the same distribu- 
tive analysis as that upon which the law itself is based. 



THE LAWS OF RETURN 503 

Why, indeed, must rent be higher, or, if higher, the other 
distributive shares also lower ? The law — valid doubtless — is 
distributive in tenor ; land receives its larger ratio of the 
value product, but this depends as much upon the peculiari- 
ties of the demand for the product as upon the technological 
conditions of its production. With some commodities, 
indeed, increasing difficulty in production cancels all 
the value of the agent. That there could be no land 
scarcity but for the limited productive powers of any 
limited area of land; that is, that high rents could not exist 
in the absence of the technological fact of the diminishing 
responsiveness of land, leaves it, in the absence of other 
conditions, still possible that rent should fall with the 
diminishing weight-and-tale return. This form of the law 
of diminishing return is, then, not so much a law illumi- 
nating other problems as deriving illumination from other 
solutions; and all laws either of diminishing or of increas- 
ing value return are necessarily of this sort. 

X. That with increasing population there goes in agri- 
culture an increasing entrepreneur value outlay relatively 
to weight-and-tale product: 

A useless formulation excepting as working out to the 
purport of law VIII, viz., that the product being, rela- 
tively to costs, smaller in value, the price per unit must be 
higher. 

XL That with increasing population there goes a higher 
rental and exchange value for land: 

The same assumption of progressive land scarcity is 
made here as in VIII ; the law is, indeed, in some respects 
practically a restatement of VIII, but with some difference 
in emphasis. Underlying either law is the assumption that 
the food demand increases in approximate proportion to 
the increase in population, that despite the fact that labor 
and capital are contributory factors, their relation to land 
is rather complementary than substitutional, and that thereby 
the emphasis of demand falls upon land as productive 
instrument. 



504 VALUE AND DISTRIBUTION 

And it is to be noted that, together with increasing 
population, there is taken to go without saying an increased 
supply of labor effectiveness, and, almost without saying, 
an increased aggregate of instrumental goads — ^techno- 
logical capital. But, in fact, were the average quality of 
labor so much deteriorated as to amount in the aggregate to 
no increase in labor power and as to permit no increase of 
instrumental goods, it would still be true, the food require- 
ment being taken as increasing with the numerical increase 
in population, that the emphasis of demand would rest 
upon land. All lines of product would suffer in output, 
but non-food lines more markedly than food lines, and this 
primarily because of so high a value upon food as to dis- 
place, in some measure, other lines of production, to widen 
the land-value differentials above the marginal powers, and 
to give high rental values to the land. 

But, if so, there must be behind all this the tacit condi- 
tion or assumption that the demand for agricultural products 
traces back to an especially inelastic quality of consumption. 
If with a doubled population, land powers being 
assumed to be fixed, there went no increase of labor power 
or of capital power, there could be no increase of land 
emphasis, if only it were as easy to cut down food con- 
sumption as other consumption. 

But still more important, because more actual, is the 
possibility that with the increase in population should go 
a more than proportional increase in the per-capita effi- 
ciency of men as wealth-producers : what then ? The pres- 
ent rendering of the law appears to say that, with the 
factors of production other than land outstripping land in 
rate of increase, those products markedly of land origin 
will rise in value, and that therewith will also rise the rent 
and the value of the unit area of land. 

But inasmuch as land is not the only productive factor 
in agriculture, it must be recognized that the demand for 
agricultural products is at the same time a demand for 
non-land instruments of production, that is to say, a demand 



THE LAWS OF RETURN 505 

for labor and capital. Therefore, were it true that labor 
and capital were in the main substitutionary rather than 
complementary in their technological relations to land in 
agricultural production, there could be no such redistri- 
bution of production-distribution advantages as is implied 
in the law as formulated. Thus, also, if it were true of 
land that it could take the place of labor and capital in any 
large share of their uses, rather than serving as co-operat- 
ing complementary productive instrument with them, land 
could never have experienced the fall in rents and in 
market price characteristic of the past half-century. 

It follows that, under the assumed conditions of increas- 
ing population, of only proportionately increasing food 
requirement, and of more than proportionately increasing 
labor effectiveness and capital expansion, there is no basis 
of foretelling the effect upon land rents and land values 
otherwise than accordingly as assumptions are made as to 
the direction of human development. Improvements in 
transportation or in the technique of production may be so 
great in the direction of agriculture as to make even the 
best grades of land free land, and thus to cancel the impor- 
tance of rent in the computation of costs, and to leave the 
food supply to find its relative cost purely in the relative 
outlays for labor and for non-land instrumental goods. 

But in the degree that the actual inelasticity of the con- 
sumption of agricultural products — not all are food prod- 
ucts — is overstated in the assumption, and in the degree 
that the development of human productive powers may 
not take place in food-product directions, must this solu- 
tion undergo modification. On the other hand, a gain in 
land rent must follow upon an increase of non-substitu- 
tionary supplies of labor; but whether this would be 
accompanied with any marked rise in the prices of food 
products would depend greatly upon the character of the 
increase in the supply of labor, whether, for example, and 
in what degree, it were adapted to other than agricultural 
production. 



5o6 VALUE AND DISTRIBUTION 

If these solutions shall appear to be disappointingly 
vague and conjectural, the explanation must be sought in 
the nature of the problem and of the assumptions neces- 
sarily attendant. 

The foregoing analysis of the various different con- 
cepts of diminishing return — and there are possibly still 
others waiting to be catalogued — should have sufficed to 
make it clear that such formulations of the law as prom.ise 
significance or serviceability for economic purposes of any 
sort, competitive or collective, are three in number : 

1. A dynamic and sociological generalization foretell- 
ing a diminution in the per-capita command of consum- 
able goods, by reason solely of the society coming to 
contain more members, these being assumed to be substan- 
tially unmodified in all relevant aspects. 

2. A law in the dynamics of competitive economics ; a 
forecast of changes in the relative distributive shares 
accruing to the different agents and instruments in produc- 
tion technologically viewed, changes due solely to changes 
in the relative supply of these concrete factors; thereby, 
changes in their relative value through the capitalization of 
their income-earning power; and thereby, also, upon the 
supply side (and for whatever the cost of production com- 
putation may be worth), and solely by reason of these 
distributive shares functioning as costs in competitive entre- 
preneur production, a forecast of the relative changes in 
the market prices of the various sorts of commodities 
technologically dependent in various degrees upon the use 
of these differently remunerated productive facts. 

3. A static, competitive, entrepreneur law expressing 
the disadvantages accruing to the entrepreneur from any 
relative excess or defect in the quantities employed of any 
productive agent or agents, in view of the existing levels 
of compensation for these different agents — a law formu- 
lating the disadvantage from the unskilful combination of 
cost goods. 



THE LAWS OF RETURN 5°? 

It is to be noted with regard to Law (i), the popula- 
tion-food law, that the reasoning- upon which it is formu- 
lated abstracts entirely from the possibility that human 
development may — at least in some measure — avail to 
enlarge the land supply, from the possibility also that agri- 
cultural technique and transportation effectiveness may 
appreciably modify the situation, and finally from the pos- 
sibility that the sources of food supply may not remain 
essentially agricultural, and that the food requirement may 
not increase precisely in the ratio that the labor supply 
increases. That, upon the assumptions made, the social 
product, food and other goods together, must be unfavor- 
ably affected seems to be a ready and necessary inference 
from the general principle that if some, but not all, of 
the productive factors are doubled, the weight-and-tale 
product will not fully double. 

Law (3) carries over into the competitive field this 
principle that a shortage in any one factor of production 
affects the product unfavorably; those factors increasing 
least rapidly, or not at all, take on relatively a more or 
less pronounced scarcity, and thereby acquire scarcity 
values as compared with the increasing factors, the degree 
of the scarcity depending upon the degree of technological 
monopoly held by the factor in question, that is, upon the 
substitutions and upon the terms of the substitutions pos- 
sible in the case, — a changing problem with every change 
in the direction of human efficiency in the technique of 
production. 

With every change in the per-capita productiveness of 
society, human needs and desires being assumed as a con- 
stant, there goes, of course, a fall in the average signifi- 
cance of new increments of product, a law of diminishing 
utility return per item of weight-and-tale product. But 
while this law is consistent with an expanding weight- 
and-tale productivity — depends indeed, upon it — the law is 
not inconsistent with unchanging conditions of value produc- 
tivity. For value productivity is distributive in reference — 



5o8 VALUE AND DISTRIBUTION 

has to do, that is, with the different factors con- 
sidered as share-takers in the division of product, and with 
the relation of the different shares to one another. Being 
a question of value, of exchange relations, it becomes a 
question of the relative shares in the total output of value 
product. Thus if all factors in production were increasing 
with, equal relative rapidity, two yards of cloth, two pairs 
of shoes, and two bushels of wheat being produced where 
before the product was only one of each, there is no 
necessary reason why there should be either increasing or 
decreasing value productivity for any factor in production. 
If, then, there is occasion to forecast diminishing returns 
for any factor, it seemingly must be by reason of some 
relative inelasticity of supply supposed to attach to some 
other factor or factors in production. It looks, then, as if 
the peculiar conditions surrounding the land supply must 
furnish the only serious basis and occasion for all dimin- 
ishing-return discussion, so far as it is something more 
than an entrepreneur law of disadvantage from a badly 
constructed production complex.^ 

But upon what assumption could there really take place 

' It is of course unfortunate that the established terminology 
should speak of this principle as "diminishing returns for land ;" where 
there are diminishing returns of any sort, these are not for the land 
but for the factors co-operating with the land. But purely as a pro- 
duction process, the returns are neither separately for the land nor for 
the other factors, but only for the factors in the aggregate, as a pro- 
duction complex. When a separation is made so that the talk may be 
either of the absolute or of the relative shares, the discussion has 
passed over from the field of technological production to the field of 
value distribution, — is no longer, that is to say, a matter of causes from 
the point of view of production, but of results from the point of view 
of distribution, — not a question of quantum or of relative share pro- 
duced by any separate factor, but of the value result attributed or 
imputed to that factor. And, as distributive result, the fact may be 
that, despite a diminishing return to the aggregate complex, there may 
be an increasing return, both relative and absolute, to some among the 
factors. As a distributive doctrine, then, the terminology should 
rather speak of diminishing returns to the non-land factors ; while as a 
production doctrine, no question of the separate shares of the factors 
should arise ; the talk should be of diminishing returns in agriculture, 
or of diminishing returns in landed production, but not of diminishing 
returns to the land. 



THE LAWS OF RETURN 5^9 

this equal proportional expansion in all productive factors, 
in such sort as to leave the value resultant one of unmodi- 
fied exchange ratios and the distributive outcome one of 
unchanged proportionate shares? Only upon the assump- 
tion that the increase in the supply of each factor of pro- 
duction has been accompanied by a proportionate increase 
in the demand for the various commodities especially 
dependent technologically upon the respective factors. But 
increase in labor supply, if it comes by increase in number 
of human beings, rather than by expanding individual 
efficiency, is certain to do at least one thing, viz., to bring 
with it an approximately proportional increase in the food 
requirement; and precisely the contrary will be the fact, if 
the increase of labor power accrues through higher per- 
capita powers of production. 

And precisely as the food requirement is the most 
inelastic of needs in face of shortage, so it is least expan- 
sive in the event of expanding supplies. It follows that 
what appears upon its face to be a prospect of constant 
value return may turn out to be one either of falling or of 
rising distributive advantage for land. And as we have 
already seen, this is further complicated by considerations 
relating to the direction in which technological develop- 
ment may take place. 

Our third law of return, the static law of the proper 
proportions for the productive factors in the entrepreneur 
complex, is obviously the only one of the three laws having 
significance for the cost problem of any particular entre- 
preneur at any particular time. Law (2) is a forecast of 
probable changes in the conditions under which the cost- 
value problem must come to be worked out. That the hire 
of any particular factor will be — or may be — greater or 
less than it now is, does not make greater or less the pres- 
ent hire, and does not modify the present relation of the 
present hire to present cost and present value. It is unneces- 



5IO VALUE AND DISTRIBUTION 

sary to look ahead fifty years in order, by finding what the 
costs will be then, to know what the costs are now. 

It must now be noted that, simply because this law of bad 
proportions between productive factors is an entrepreneur 
law, it must, in any accurate formulation, take into account 
the entrepreneur himself as a productive fact. As entre- 
preneur, he is a fixed quantity, and at some point or other 
the law of disadvantageous combination, of diminishing 
value return, must apply to any further increases in the 
magnitude of his operations, and must set a limit to the 
application of the law of increasing returns with the 
greater size of the production complex. 

It remains once more to call attention to the danger- 
ously technological tenor of all this diminishing-return dis- 
cussion. For purposes of retrospect or of prophecy, and in 
the field of value distribution no less than in the field of 
social welfare, there are meaning and interest attaching to 
the broadly admitted threefold classification of productive 
factors. But it is equally clear that the classification is 
inaccurate and unworkable for close theoretical purposes ; 
that the technological relations between the different pro- 
duction goods are in a state of constant flux; that the sub- 
stitutionary relation is everywhere found in a measure, and 
is almost as likely to obtain between classes of factors as 
within any one class, while the complementary relation is 
not appreciably rarer within a class than between classes; 
that the determination in any specific case of what share is 
land instrument and what share non-land is impracticable 
or impossible; and finally and chiefly, that in competitive 
production no one. is concerned in any way either with the 
validity of the classification or with the accuracy of its 
application. 

For, from the point of view of the individual, all ques- 
tions of cost are questions of value expense, and capital is 
merely the fund out of. which the costs are advanced and 



THE LAWS OF RETURN Sii 

into which the instrumental charges and all other produc- 
tion expenses are reduced. Thus while, if one likes, he 
may distribute this capital expense among its different 
technological and other items, including much that cannot 
be classified as either land, labor, or capital, it will remain 
true that the outlay for labor hire is a capital outlay, the 
outlay for capital goods likewise a capital outlay, the outlay 
for land also equally a capital outlay, and therefore that the 
law of diminishing return is, for competitive purposes, a 
law of diminishing return upon capital and not upon land 
or instruments or labor. And to show that this falling 
return upon capital is or is not due to unfortunate com- 
binations of technological items indefinite in variety and 
susceptible of indefinite classification and subclassification, 
tripartite or other, would leave it still true that, for all 
competitive purposes, the only falling return having sig- 
nificance or interest must be the falling return upon value 
cost, expressed under the private-capital denominator. But 
all this will become clearer, as approached from a slightly 
different point of view, in the next chapter. 



CHAPTER XXIV 
THE DYNAMICS OF VALUE AND OF DISTRIBUTION 

As has already been sufficiently shown, the long-time 
computation of costs, the dynamic aspect of economic 
theory, points not to a new value theory or even to a 
supplementary value theory, but simply to the tendencies 
and influences making for change in the fundamental con- 
ditions under which the value problem must later be worked 
out, the costs fixed, and the production distribution reached. 

These changes in fundamental conditions are evidently 
restricted to two sorts, (i) changes in the demands for 
consumption goods, and (2) changes in the supplies or in 
the ownership of the productive agents, instruments, rights, 
and opportunities. 

That either of these two lines of influence may affect 
the remunerations of productive factors, and thereby their 
values, is readily seen ; that changes in the demand for 
products should have the same result carries its own war- 
rant in the very statement; so, also, that changes in the 
supply of any factor of production must affect the remunera- 
tion of it commends itself as obvious — looks, indeed, much 
simpler and clearer than it really is. But that changes in 
the supply of some factors have of necessity direct and 
important bearing upon the remunerations of other factors 
is a long distance away from self-approving. 

It is nevertheless true : 

A demand for means of production arises only when, on the 
one hand, we are obliged to employ them or else go without what 
they produce; and when, on the other hand, we can employ them, 
inasmuch as we have at our disposal the necessary complimentary 

goods It follows .... that the effective demand for means 

of production must vary, not only when there is a variation in per- 
sonal wants, but also when there is a variation in the quantity of 
complementary goods.^ 

^ Wieser, Natural Value, p. 102. 

512 



DYNAMICS OF VALUE AND DISTRIBUTION 513 

The demand for plows is truly derivative from the 
demand for foods, but not directly; in any event, it is 
equally to be said that the supply of land furnishes the 
demand for plows; lumber affords a demand for nails, 
horses for wagons, wagons for horses, plows for land, men 
for plows, plows for men, horses for stables, stables and 
horses for carpenters and for stable boys, horses and 
wagons for harnesses and for drivers, etc. 

It is true that not rarely the possibility of substitution 
exists between different orders or varieties of productive 
agents, — that one sort takes the place of another, supplies 
the demand for it, rather than furnishes a demand for it. 
But more commonly it is through the principle of comple- 
mentarity rather than of substitution that most of the 
dynamic forces in economics exert their influence upon sup- 
plies of products, upon entrepreneur bidding, upon costs 
and distributive shares, and upon the exchange relations of 
goods, as it is likewise under this same principle of com- 
plementarity that various perplexing theoretical problems 
both in static-value imputation and in dynamic-value impu- 
tation are presented. New combinations of productive 
factors entail what new value results and what new dis- 
tributive outcomes? 

The usual treatment of the problem, as one centering 
about questions of multiplying human beings as over against 
a geographically limited land supply, emphasizes what is, 
for economic prophecy, the most important and interesting 
phase of this investigation ; for it is again to -be emphasized 
that only in the expectation that some factor or factors of 
production will come to be relatively scarce is there any- 
thing to be discussed. The laws of increasing return are 
laws of change in one aspect of human productive ability 
and adaptability; the laws of diminishing return are laws 
reflecting the influence of change in the relative supplies of 
the different factors of production. It is, perhaps, true, 
practically speaking, that, but for the limitation upon the 



514 VALUE AND DISTRIBUTION 

land supply, there could be nowhere any question of dimin- 
ishing returns for social or dynamic problems. 

And it is again to be emphasized that, with changing 
supplies of productive factors, such changes of combina- 
tion, of product, of value of product, and of values of 
agents as take place, must take place under the guidance of 
entrepreneur activity and as problems of entrepreneur 
management. Technological productive contributions are 
such only relatively to the entrepreneur need, the entre- 
preneur combination, and the entrepreneur bid. As dis- 
tinguished, then, from the ordinary threefold classification 
of productive factors, land, labor, and capital, there must, 
at the least, be established a fourfold classification includ- 
ing the activity of entrepreneurship. And our most serious 
problem is thereupon to decide whether, even as modified, 
the traditional distribution of productive categories is either 
workable in theory or serviceable in applications. 

Precisely how the dynamic forces shall be classified is, 
from one point of view, perhaps not an important matter. 
Clark's fivefold division into changes, (i) in population, 
(2) in capital, (3) in industrial methods, (4) in business 
organizations, (5) in human wants, is possibly as service- 
able as any other. Making some effort, however, toward 
arriving at a classification more nearly approaching the 
ultimate, we shall, perhaps, settle upon something like the 
following: (i) modifications in humanity, (2) in environ- 
ment. Under modifications in humanity are to be cata- 
logued the following lines of change: 

(a) in numbers. 

! changes in aggregate wants, 
changes in relative intensity, 
changes in kind and direction. 

i changes in industriousness or strength, 
changes in technique, 
changes in organization. 



DYNAMICS OF VALUE AND DISTRIBUTION 515 

Under modifications in environment : 

, . . 1 J j changes in the sources of food supply, 

^ ^ \ changes in the sources of raw materials of industry. 

(b) non-land changes, capital goods. 

Sfrom the point of view of each entrepre- 
neur an objective, environmental fact; 
from the social point of view merely re- 
lations among men; perhaps properly 
to fall under "modifications in human- 
ity." 

But here again the question presents itself as to what 
purpose, other than schematic, this classification may be 
made to serve; but if for nothing further, it will, at any 
rate, afford a convenient guide for purposes of exposition. 

Doubtless it is possible to make some broad generaliza- 
tions with regard to the effects of increasing population 
upon land values and upon land rents in the aggregate, 
irrespective of whether all lands must equally share in 
these effects. Possibly also, though less securely, some- 
thing might, in wide generalization, be said of the effects 
of increasing machinery upon rents or upon wages, all this, 
likewise, without attempt to differentiate the sorts of 
machinery, and also without attempt to distribute labor into 
different sorts and grades in its technological relation to 
machinery. 

But the difficulty with all this is that all of it has its 
basis in the technological relation of different instruments 
and agents to one another, and that these technological 
relations will not classify in even a loose and general coin- 
cidence with the traditional threefold classification of pro- 
ductive factors. 

Increase of literary ability is technologically irrelevant 
to the increase of inventive power in industry ; increase of 
artisan skill may intensify the demand for some machinery, " 
the while that it displaces other. Again, the multiplication 
of unskilled labor may in some directions displace skilled 
labor or the labor-saving appliances produced by it. It is, 
for example, practically impossible, because unprofitable, 



5i6 VALUE AND DISTRIBUTION 

to introduce labor-saving machinery into Mexico or India; 
crude labor in those countries is too cheap compared with 
artisan labor. At the same time, enlarged supplies of some 
grades of labor furnish a demand for other grades of 
labor, e. g., carpenters for architects and masons, masons 
for hod-carriers, spinners for weavers, and so on indefi- 
nitely. Again, some machinery creates demand not for 
land as complementary good, and not, in any appreciable 
degree, for labor, but for other machinery. In the history 
of English industry, the spinning jenny placed an immense 
premium upon the invention of the power loom, and both 
called shrilly not for more men but for the introduction of 
power machinery.^ 

And mere increase in population, to the extent that it 
should be attended by the traditionally menaced poverty, 
would not greatly intensify the demand for champagne 
lands, or place, high values on diamond fields ; something 
would result of advantage for apple and prune orchards, 
a lower degree of advantage to orange and walnut groves, 
great stress upon fuel and iron mines, and famine rents for 
the sources of the coarser foods. New coal lands would 
injure the wood lots, and benefit the iron mines. New 
fisheries would probably lower the income from pasture 
lands, and, perhaps, intensify the demand for cereal lands. 

The truth is that all these relations, on the one hand, of 
complementarity, on the other, of substitution, depend upon 
the particular situation in point of technique, and have not 
even the remotest relation to the land-capital-labor classi- 
fication. It is possible enough, it is indeed characteristic 
of modern life, that modifications in technique, that is to 
say, in the human factor of production, greatly reduce the 
pressure upon land. This is especially noticeable in the 
effect of farm machinery toward the lowering of agricul- 
tural rents taken in the aggregate. Improvements in trans- 
portation work in the same direction, and at the same time 

^ Fully worked out, the doctrine of this paragraph has some impor- 
tant applications to immigration problems. 



DYNAMICS OF VALUE AND DISTRIBUTION 517 

do another thing, they create accessibility; thus, practically 
speaking, they create land. 

So, new knowledge is constantly sending much old 
machinery — and some new machinery — to the scrap pile, 
and this, not rarely, with the requirement of no new 
machinery. 

So again, changes in the standards of living or changes 
merel}^ in the direction of consumption may cancel the 
alleged effects of the m.ultiplication of human beings upon 
rent and interest: for example, vegetarianism would post- 
pone the land famine for a succession of centuries. 

And changes in technique may conceivably be so far- 
reaching as to leave to humanity practically no land prob- 
lem at all, or, at least, only a mining-land and dwelling- 
land problem : 

Chemistry may some time solve the problem of food production 
without recourse to agricultural methods. The secret once known, 
the nitrogen in the air of the back yard and the ton of coal in the 
bin may furnish food for an ordinary family for a year.' 

But none of this is to deny that there is a dynamics to 
the value problem, or rather to the distribution-and-cost 
aspect of the value problem, but only to deny that much 
more can be done with it than to surmise here and there, 
as well as may be, what are the probable changes in condi- 
tions, and then to deduce the probable and possible eco- 
nomic significance of some few of these changes. 

Increasing population appears reasonably probable, 
though there is question enough as to the races and the 

' Davenport, op. cit., sec. 352. 

It is a noteworthy as well as a perplexing fact that one of the 
economists firmest in adherence to the separate land and capital cate- 
gories, and strongest in the conviction that interest and wages are cost 
facts while rent is not, should have given allegiance to doctrine which, 
suiificiently elaborated and worked out to its necessary conclusion, 
must cancel the possibility of all discussion of the laws of return as 
based upon the threefold division of categories ; and incidentally also, 
would strike the pen across most of the pages of his own admirable 
anld suggestive work upon the distribution of wealth. (See Carver, 
Distribution of Wealth, p. 85, or quotation, note ante, p. 131.) 



5i8 VALUE AND DISTRIBUTION 

classes likely to furnish the increase. No attendant changes 
appear probable of a sort to prevent an increasing stress 
upon land, varying in degree, it is likely, according to the 
different qualities and capacities of the land, but probably 
affecting in some measure all or almost all lands. But the 
swamps of the Amazon or the African jungle may for a 
long time remain an undisturbed surplus. And in this 
connection also it would be possible for the growth of 
land rent to impose important changes in the distribution of 
purchasing power in society, and thereby to work appre- 
ciable modifications in the direction and volume of different 
consumption demands, with wide and conflicting circles of 
varying interaction. 

From the land source, together with other influences 
bearing upon the consumable product at the disposal of the 
human race, more or less pronounced effects may be deduced 
as probable upon the standards of living of the different 
races and nations of men, these effects being different with 
the different races and in the different levels of society of 
each different race. And various interactions between 
standards of living and rates of multiplication may be more 
or less dubiously asserted. And possible bearings of 
standards of living upon wages may be worked out through 
the general relation of the density of population to the 
wage level. 

But what is, in truth, other things remaining unchanged, 
the bearing of increasing population upon the wage 
level ? 

To make the question accurately intelligible it must be 
as'sumed that the different grades and kinds of labor 
increase proportionally. And even then will it do to assert 
that wages must fall? How comes it to be true, if it is 
true, that the volume of population influences the wage 
level? Is it, for example, possible to say, with Carver, 
that "the wages of labor are determined by an equilibrium 
of two forces, — the productivity of labor, on the one hand, 



DYNAMICS OF VALUE AND DISTRIBUTION 519 

creating the demand for it, and the standard of Hving, on 
the other hand, Hmiting the supply of it." * 

Not at all denying the bearing of these two forces as 
somehow influencing wages, each in its own way and time, 
it is yet to be objected that the ways and the times are 
separate, that the offered explanation of wages is really a 
mixture of long-time and short-time influences, — on the one 
side a static category, a situation, on the other side a 
dynamic variant making for possible changes, — and then a 
balance somehow struck between them. The analysis 
neither stays in nor abandons the field of entrepreneur 
wage costs, but confuses the costs as they are with supposed 
causes of the costs, and with possible or probable variations 
of the costs. But, even so, the argument is open to further 
serious criticism; for in reality the standard of living is 
itself a derivative from the productivity of the labor; the 
standard of living, as supply term, set over against pro- 
ductivity as the demand term, will, then, hardly serve as a 
full explanation of wages. But however this may be, it is 
in any case clear that as a question of existing wages the 
productivity of today cannot, for any purpose of present 
costs or present wages, or under any entrepreneur compu- 
tation, be equated against the labor supply of some years 
hence. The wages of all the yesterdays and of today may 
possibly have something to do with the supply of labor 
twenty years hence ; and the supply of labor of that time 
will doubtless equate against the demand of that time. The 
supply of today has precisely that same relation to the 
demand of today. Today there is no equating of the 
demand or supply of today with the demand or supply of 
any other time. Any alleged effect from wages, through 
standards of living, on the supply of labor, — whether, on the 
one hand, the position urged be that high wages and high 
standards of living stimulate the birth-rate and the per- 
centage of maturities, or whether, on the other hand, the 

* Carver, "The Marginal Theory of Distribution," Journal of 
Political Economy, March, 1905, p. 263. 



520 VALUE AND DISTRIBUTION 

effect be asserted to be precisely the reverse — may be equally 
well admitted or denied with equal irrelevancy to all prob- 
lems of the current adjustment of wages; productivity is 
as it is. Investigation of these lines of influence is, then, 
merely a more or less successful attempt at a historical 
explanation of the present labor supply, and, so far as the 
labor supply has to do with the individual wage, is an 
attempt to explain some of the causes of the present condi- 
tions controlling or influencing the ruling level of wages. 
But the ruling level of wages will be the same 
whether or not the historical explanations offered 
be well supported. So the wages to rule twenty years 
hence may today be possible of vague conjecture; and 
in the making-up of the prophec}^ some bearing may 
be ascribed to the expected population totals of that time; 
and these totals may, with more or less justification, be 
attributed to the standards of living prevailing today. But 
all this is prophecy, and has nothing to say for the wages 
of today. 

Nor — and this is the important fact for the present dis- 
cussion — even after the twenty-years' term has expired, 
will such population changes as may have taken place have 
overmuch to say; it is vastly dangerous doctrine to assert, 
even on the supply side, the dependence of wages on the 
supply of labor. For consumption goods, truly, the reason- 
ing rightly runs that an increased supply diminishes price; 
but for production goods the doctrine, so far as it is appli- 
cable at all, applies in quite other significance and to quite 
different results. Whenever the very increase in supply 
itself implies and necessitates a change in the volume of 
demand, the demand-and-supply formula, entirely accurate 
for consumption goods, becomes, for production goods, 
entirely misleading unless used in a very dift'erent sense. 

If the labor supply increases, how can anyone know 
that the wages must fall ? Is it certain that either the per- 
capita productivity by weight and tale or the per-capita 
value productivity must suffer? Not unless the other 



DYNAMICS OF VALUE AND DISTRIBUTION 521 

classes and qualities of agents have failed to make a corre- 
sponding increase. And suppose that they have not ; with 
an increased labor ^supply the social dividend is increased; 
is it to be assumed that only the old total of wages can, 
under the new aggregate productivity of labor, be dis- 
tributed among laborers? If labor has doubled and all 
kinds of it have doubled, but if, at the same time, the other 
productive factors have failed to increase or to increase 
with corresponding rapidity, it may be taken as true that 
not quite twice as much aggregate social product will be 
possible; and out of this somewhat smaller per-capita 
product a larger relative share will go to the agents rela- 
tively scarce, and a somewhat smaller relative share to the 
laborers. And this is all there can possibly be of truth in 
the proposition that "the wages of labor are determined 
by an equilibrium of forces — the productivity of labor, on 
the one hand, creating the demand for it, and the standard 
of living of laborers, on the other hand, limiting the 
supply of it" (Carver). 

To put it another way: Since with the change in the 
supply of labor the value product to pay with is all the 
while changing, that is, the productivity demand is chan- 
ging, the effect upon the wage level must sum up as the 
solution of two inquiries : ( i ) in what measure, relatively 
to the increase of labor, is there a resulting increase in the 
total product to be distributed? (2) in what measure does 
labor, in the distributive process, fail of receiving the whole 
of the increase in product resulting from the labor increase ? 
It is evident that an appeal to the ordinary demand-and- 
supply formula does not promise great results for the 
purposes of this problem. 

Inasmuch as changes in population can take place only 
with attendant changes in the demand for goods and in the 
production of goods and in the distribution of purchasing 
power, there is room here for all sorts of varying influence 
upon values and upon distributive shares. No especially 



5^2 VALUE AND DISTRIBUTION 

serious difficulties, however, present themselves in this 
regard. 

Possible changes in the productivity of human effort, 
through increases in vigor, in earnestness, in trustworthi- 
ness, and in skill, require some attention. And, for the 
moment, let changes in technique be excluded from con- 
sideration, so that the case may stand simply as one of 
emphasized power in lines and methods and directions 
already established. Twice as efficient a man is, for pro- 
duction purposes, two men; on the production side, this 
amounts, then, to a population increase. Are land rents to 
be thereby increased, or is the value imputation in general 
to be otherwise affected disadvantageously to labor? 
Seemingly so; for while, with larger weight-and-tale pro- 
ductivity and a greatly augmented social product, the abso- 
lute share of labor may increase, its ratio share will suffer. 
But all this is subject to amendment accordingly as the 
increased purchasing power, attendant upon higher pro- 
ductivity and higher wages, turns out to be directed. If, 
for example, all this new demand power were directed to 
the purchase of new sorts of personal service, or to lines 
of goods in which labor alone could be applied, the new 
labor power could furnish no new demand for land or for 
any other instrumental good, and no advantages in distri- 
bution could accrue to any of these non-human factors of 
production as against labor. 

Better organization of production may be merely insti- 
tutional, or it may point directly to an increase in entre- 
preneur efficiency; if, however, it be assumed that the 
increase of product is due solely to an improvement in 
entrepreneur ability, it may, prima facie, be expected that, 
out of the resulting higher social dividend, the larger share 
will be distributed to the non-increasing factors, employee 
labor being here included. But here also the breadth and 
the undiscriminating inclusiveness of the accepted classi- 



DYNAMICS OF VALUE AND DISTRIBUTION 523 

fications destroy all promise of accuracy in the conclusions. 
Better organization does not apply equally to all grades and 
kinds of labor, or equally in all businesses and industries, 
or equally to all kinds and varieties of instruments. The 
threefold classification must be especially misleading here. 
But even more misleading is the traditional classifica- 
tion as related to changes in technique. Hygiene may 
render pill-rolling machinery useless ; inventions may 
largely displace both labor and instrumental goods, and 
may shift the emphasis over upon land generally or upon 
particular kinds and qualities of land. There is, in truth, 
no limit to the possible and the probable permutations here ; 
here, indeed, it is always the unexpected that is the 
probable. How complicated these problems are, and how 
dependent for their solution upon assumptions tacitly made 
or unconsciously implied, may be seen in an analysis of 
the relations of improvements in transportation and in 
crop-raising technique to the rental values of land.^ 



° Traditional discussion of the rent problem has assumed a prac- 
tically inelastic consumption for the products of agriculture. Making 
no question that, relatively to other consumption goods, food products 
manifest a great inelasticity of consumption, it is nevertheless to be 
asserted that this inelasticity has been, in almost all rent discussion, 
past or current, greatly exaggerated, to the serious prejudice of the 
theoretical deductions. It is at any rate clear that "the law of 
diminishing returns falls far short of a full theoretical equipment 
for the analysis of rent movements. This law points merely to one 
very important fact in the supply aspect of the problem. But dimin- 
ishing returns are the condition upon which rents depend rather than 

their ultimate cause No economic explanation in terms of 

supply alone is exhaustive or satisfactory How rapidly, for 

example, rents may advance with an enlarging market for products, 
must depend upon the measure in which demand will be retired by 
rising prices. How rapidly rents may be made to fall by the opening 
up of new lands, is incapable of estimate till something is known of the 
degree in which falling prices may be expected to attract a larger 
consumption. All rent tendencies must be studied, not alone from the 
point of view of the facts peculiar to supply, but as well from the 
point of view of the peculiar nature of the demand. 

"Commodities vary greatly in the elasticity of consumption. With 
falling prices, the demand for books, for example, greatly expands, 
while higher prices would be met by greatly decreased consumption. 
Where consumption is very elastic, small changes in price work large 
changes in consumption. It follows, then, that small changes in supply 



524 



VALUE AND DISTRIBUTION 



The relations of expanding capital supplies to land 
rentals and to wages can be, so far as they are profitable of 

must work small changes in price, while large changes in supply work 
only limited changes in price. 

"But where the consumption is inelastic, the reverse of all this is 
true. Small increments in supply are marketable only at considerable 
decrease in price, while large increases in supply work enormous price 
reductions. Much that is peculiar to rent movements is to be explained 
by the fact that the consumption by society of the products of the 
earth, and particularly of agricultural products, is extremely inelastic. 
Consumption of food products cannot be very largely increased, nor is 
it possible without acute suffering greatly to reduce consumption. 
It is true that in considerable measure one product may be substituted 
for another by reason of minor changes in price, but the total volume of 
consumption adjusts itself to the total volume of supply only through 
relatively great price fluctuations. Were the fact otherwise, advances 
in rents following upon increased population would have been much 
less considerable, and a fall in rents resulting from the opening up of 
new supplies of land would be relatively unimportant. 

"Bearing in mind that increasing supplies of agricultural products 
are unmarketable unless at rapidly falling prices, it becomes evident 
that all causes tending to increase the per-acre productiveness of land 
will mostly manifest themselves in the abandonment of marginal lands 
and the decrease of rental totals. Thus all progress in agricultural skill, 
like better methods of crop rotation, or improvements in the applica- 
tions of chemistry to the production of fertilizers, by which the per- 
acre output of land is increased, will tend toward the disuse of the 
poorer qualities of land. Likewise all improvements in transportation 
facilities, by which new and more fertile lands are brought into use and 
the abandonment of poorer lands made possible, must reduce the rent 
differential. 

"And even with the new lands only equally fertile with the 
old, the reductions in the cost of transportation would reduce 
the differential of advantage enjoyed by the lands 
nearer the market. Not less land would be used, 
14 2 30 17 but the difference in advantages would be lowered. 
In the diagram the transportation charges of 2, 4, 
6, 8, etc., give rentals of 14, 12, 10, etc. Reducing 
the cost of transportation by one-half lowers the 
differentials to 7, 6, 5, 4, etc. It is true that this 
cheaper transportation would cause some of the 
more distant lands to be brought into cultivation. 
But only a small increase in products could be 
marketed without so great a fall in price as 
seriously to affect rents generally. 

"Assuming, however, that the land opened up 
is of distinctively inferior quality, one might look 
for a rise in rents. But the question is whether 
this wider differential of fertility can be sufficient 
to more than offset the diminished differential of 
transportation. 

"Suppose that the land is 30, 28, 26, 24, etc., in 
productiveness, and that the transportation charges are 2, 4, 6, 8, 10, 





LAND 


2 


30 


4 


30 


6 


30 


8 


30 


10 


30 


12 


30 


14 


30 


16 


30 




30 



3 S 



4 4 



5 3 



DYNAMICS OF VALUE AND DISTRIBUTION 525 



discussion here, mostly deduced from the principles already 
established. But much depends upon the sense in which 

etc., as in the previous illustration. Each grade of land, from the 
margin, increases in rent by 2 for differential of fertility, and by 2 more 
for diiferential of freight. 

"If now the freight differential falls to i for each grade, the 
rent payments will fall from 20 + 16 + 12 + 8 + 4 to 15 + 12 + 9 + 6 + 3. Even 

could cultivation extend two girades 
lower without a material fall in prices, 
io+5~iS this would carry the rent payments only 
to 21 + 18+15 + 12 + 9 + 6+3. In fact, 
8 + 4 = 12 however, prices would greatly fall upon 
the assumption of this extension. These 
6+3~ 9 lands could no longer be treated as 
30-, 28-, etc. (bushel) times one (dol- 
4+2= 6 lar) lands. The 2, 4, 6, 8, etc., as dif- 
ferential in bushels, would still remain, 
^ ■" ^ ~ 3 but these bushels would have greatly 
shrunk as measured in terms of 

market value 

"It is not even true that improve- 
ments in the art of agricultural neces- 
sarily lower rent, if these improve- 
ments are such as to apply solely or 
mostly to the better lands. If, for 
example, there were in cultivation 

2 units of 30-bushel land 

3 " " 29- " 

5 " " 28- " " 

6 " " 27- " 

and some method were devised of doubling the output of classes i and 
2, it would still remain necessary to cultivate some of the 27-bushel 
land, while the 30 and 29 lands would have become 60 and 58 lands 
with their rent differential measured from the old margin of 2."], 

"In no case, then, is it safe to assume that the mere fact of the 
extension of cultivation to inferior lands means of necessity an 
increase in rents. For anything like an accurate forecast of rent 
tendencies in any case, there is required a Gregory King's law of 
altogether unattainable accuracy. Were the demand for agricultural 
products as elastic as is the demand for books, or sewing-machines, or 
bicycles, improved arts of transportation would probably raise rents. 
If, for example, rent differentials were due one-half to lower expenses 
of transportation, and these expenses were reduced by one-half, it 
would become practicable to cultivate much larger areas of land, if the 
demand for products were such that the prices should not sharply 
fall. In this case, rents would increase in the total. 

"Ultimately, then, we fall back upon the character of the demand 
as the critical point in our rent investigation. The law of diminishing 
returns explains the existence of rent only after demand is assumed. 
The degree of rise or fall in rent can be guessed at only in view of 
the demand. 

"Some questions we can hardly even guess at. It is com- 



IO-HlO = 20 


30 


8+ 8 = 16 


28 


6-H 6 = 12 


27 


4+ 4= 8 


24 


2+ 2= 4 


22 




20 




18 




16 




14 



$26 VALUE AND DISTRIBUTION 

the term capital is to be understood. If taken as loan-fund 
or as competitive capital in the most inclusive sense, it 
would follow that cheaper capital, meaning merely lower 
rates of interest, might raise or might lower rents accord- 
ingly as, under the prevailing conditions of technique, the 
borrowed purchasing power should be directed to comple- 
mentary or to substitutionary goods. 

But if the term capital be taken to mean non-land pro- 
ductive instruments, further assumptions become necessary. 
How elastic is the consumption -of agricultural products? 
And how far is it taken as possible that non-land 
instruments can be made to function successfully on lands 
which were before submarginal? Costless capital goods 
might conceivably go so far in substitutionary lines as to 
destroy all differentials of serviceability between different 
lands, or even as to render all lands equally valueless. 

But all this detail grows wearisome, simply because 
there can never come any end to it ; at the best, it is mostly 

monly assumed that improvements in farm machinery work in line 
with improved fertilizers and improved methods to reduce rents. This 
is correct for such machinery as increases the per-acre output. But 
for the most part, these labor-saving devices are not land-saving 
devices. They increase the amount of land employed in producing a 
given amount of product ; thereby they lower the margin of fertility, 
exactly reversing the effect of fertilizers. If rents fall, it must be 
from the fact that cultivation is carried so far upon inferior soils, as 
through a considerable expansion of supply, to lower prices, and to do 
this to such an extent that the influence of an increased differential 
in product is overcome by the necessity of marketing the products at 
lower prices." — Davenport, op. cit., pp. 86-91 (somewhat adapted). 

But a caution is needed here. Doubtless the lands especially 
affected by new transportation facilities may exhibit a marked rise of 
rentals. So likewise the opening up of America may have had more 
effect to advance rents here than to depress rents in Europe alone. 
This means merely that to the extent that the agricultural market is 
world-wide, so must also be the rent generalizations, if they are to be 
theoretically safe. 

But neither in theory nor in fact does room for doubt remain as 
to the validity of the point at present urged. Improvements in trans- 
portation and in agricultural technique, improvements, that is, in the 
efficiency of human effort as applied to production, serve to reduce the 
pressure upon the land factor in production, — function, that is to say, 
as substitutionary rather than as complementary agents. 



DYNAMICS OF VALUE AND DISTRIBUTION $27 

a disciplinary gymnastic. But this much, at least, stands 
forth clearly : Every problem in the dynamics of value, in 
its distributive aspect, must seek its solution along two 
lines of inquiry: (i) how does the new development 
affect the social dividend; (2) does the new development 
bear, as complementary good or process, to make relatively 
greater the demand for the instrument or agent under 
examination, or rather is the relation one of substitutionary 
good or process, summing up, that is, in the emergence of a 
new competitor, or, practically, in an increase in the supply 
of the goods under examination? 

The bearing of education upon the various distributive 
shares must be worked out as in parallel with other develop- 
mental influences making toward increase in the productive 
efficiency of human effort ; but allowance must be made for 
the different effects upon different grades of human activ- 
ity, — the probable effect, for example, to lessen the differen- 
tials in favor of entrepreneur activity as against employee- 
ship. And other effects toward increase in the volume and 
in the variety of consumption requirements would come 
in here for discussion, 

A seemingly more difficult question is that of the prob- 
able future tendency in the rate of time discount. So far 
as the trend of things is toward an increasing social pro- 
ductiveness and an increasing per-capita share in that prod- 
uct, and thereby a diminished pressure of subsistence needs 
upon the individual income, it would seem safe to infer an 
increasing volume of deferred rights of consumption offer- 
ing themselves upon the market. On the other hand, there 
appears probable a progressive development in the science 
and technique of industry. Temporarily, then, at any rate, 
the greater ease of saving may be offset, in effect upon the 
discount rate, by the increasing weight-and-tale productive- 
ness of indirect methods of production. 

But here again much depends upon the degree and direc- 



528 VALUE AND DISTRIBUTION 

tion in which improvements in technique express them- 
selves in the form of substitutionary devices and instru- 
ments rather than of complementary instruments in relation 
to the general stock of instrumental goods. It is con- 
ceivable that knowledge of ways of getting on without 
capital should greatly limit the capital-goods field of invest- 
ment for the loan fund. 

So the increase of savings and the growth of capital 
goods might go so far, in directions substitutionary to 
particular grades or qualities of labor, as to depress the 
wages of these laborers even below the permanent subsist- 
ence minimum. But it is difficult to conceive how laborers 
in the aggregate could seriously suffer through any pos- 
sible increase of capital instruments produced in the main 
by labor, unless, indeed, these instruments were of a sort to 
function with reference to labor as substitutionary goods, 
and at the same time, with reference to land, as comple- 
mentary goods. In such case, manifestly, no difficulty 
could arise in any lack of supplies of consumption goods at 
human disposal, but only with the distributive titles under 
which the distribution would take place; rent would tend 
to absorb the entire social product. Parallel theoretical 
possibilities present themselves in connection with such 
developments in methods and devices as should tend to dis- 
place either capital goods or labor or both. 

And there is possibility in many industries of monopoly 
organization going so far and so profitably, through the 
increase of savings and of capital goods by entrepreneurs, 
and through the decrease of consumption demand on the 
part of the laborers, and through the displacement of 
labor by substitutionary instruments, as to bring about 
either a progressive non-employment of labor, or an 
employment upon increasingly harsh conditions, and to 
bring about at the same time a tendency toward an increas- 
ing volume of consumption loans, represented either by 
an increasing volume of indebtedness from the non-capital- 
izing classes to the capitalizing classes, or, more probably, 



DYNAMICS OF VALUE AND DISTRIBUTION 529 

an increasing resort to public debts both by the employee 
class seeking employment and by the capitalizing classes 
seeking avenues of investment.^ 

" But all of this leads up to questions falling within the problem of 
what has been termed the "fallacy of saving," — upon which problem the 
present writer is disposed to confess himself sorely perplexed. 

Ruskin, Robertson, Hobson, and Veblen seem to have done the 
best work here, not perhaps toward the solution of the problem, but to 
the development and definition of it. Surely, the ordinary "capital" 
talk, with its assumption that capital must be both concrete goods and 
relatively to labor complementary goods, is crassly superficial. And the 
whole subject is seemingly in intimate and intricate relations with the 
phenomena of industrial depressions. (See page 227, note.) 

The truth may be something as follows : 

So long as industrial technique will permit the utilization of new 
supplies of production goods, at results surpassing in service the dis- 
placed products or the displaced consumption represented by the 
intermediate appliances, so long private saving may be a clear 
advantage to society as a whole, but this only upon the assumption that 
the saving goes to the increase of productive equipment, rather than to 
private consumption loans, or to fiscal extravagance, or to the orgies of 
war. 

But on what terms can any agency making for increased volumes 
of products render service to society? Only upon the condition that 
the products are to be consumed, upon the condition, that is to say, 
that the standard of consumption keeps pace with the increase in 
productive efficiency. 

But even so, something may depend upon what classes of society 
do the consuming. Is it well that those classes receiving large incomes 
of purchasing power shall further capitalize to the indefinite increase 
of instrumental goods, or would they better consume? 

Note that the question is not at all whether these disposable 
incomes were reputably earned, or were institutionally justifiable, or, on 
the contrary, were predatorially obtained, or were better otherwise 
distributed, but only whether, once obtained, and however obtained, 
they are, from the point of view of the other classes of society, better 
consumed forthwith by their recipients, or are better directed into the 
creation of new technological equipment. 

We must, then, first inquire whether and in what degree tech- 
nological capital may, in ordinary times, affect the distributive shares 
of other factors and claimants in production. 

If it were true that, for whatever addition to product were due to 
the new instruments, an equivalent income accrued to the owners of 
these instruments, it would follow that other claimants could have no 
interest in the increase of capital. The problem is, then, in this 
aspect, a problem in the theory of distribution ; for it is clear that in 
the imputation of distributive shares, the other claimants will receive 
some share of that product mechanically attributable to the enlarged 
supplies of technological goods. In this sense only, and by this method 
only, does the employer's capital benefit the laborers or other claim- 
ants. Any solution which directly deduces from the fact of an 
increasing social dividend made possible by capital, or from the fact of 



530 VALUE AND DISTRIBUTION 

But let it be assumed that an advance in rentals is to 
accrue to certain classes of instrumental goods, e.g., land; 
will this advance in rentals express itself in a higher per- 

better tools in the hands of labor, a larger wage for the laborer, is a 
solution superficial in reasoning and inaccurate in conclusions. 

Thus it is clear that such part of private capital as actually goes 
to the increase of productive equipment benefits the laborers, and other 
claimants, if and when the consuming disposition of society is keeping 
pace with its productive power ; but this advantage is limited to what 
the technological equipment adds to product more than the distributive 
share imputed to the equipment. 

It is then mostly or largely true that the capitalist's role is here 
only one of postponed consumption on terms of receiving later an 
increased volume of consumption. There is, however, in the total, an 
advantage to labor, so long as there is market both for its product and 
for the product of the extra equipment. But when and how far is 
there this market? Is consumption by the capital-owners and by 
the rich generally a necessary fact, if the volume of consumption ik 
to keep pace with the volume of product? And when this is answered, 
what about the private capital which is unrepresented by technological 
equipment and the correlative incomes unrelated to increased product ? 

The question whether standards of consumption do commonly keep 
pace with productive power so that, commonly, no surplus productive 
equipment comes to exist, and the question whether standards of con- 
sumption must commonly thus keep pace, are distinct and separate 
questions. To the present writer it appears to be true that, excepting 
in times of postycrisis depression, the standards of consumption do 
now, in most modern societies, manifest the requisite power of expan- 
sion, but that there is no theoretical necessity for this ; and it appears 
equally clear that in post-crisis times there is a distinct and disastrous 
restriction of consumption, with the result (i) that much equipment is 
temporarily a surplus, and (2) that in some measure there takes place 
in industrial processes a displacement of labor by capital goods. 

And it appears to be true that the very fact that, through develop- 
ing technique and increasing equipment, a high per-capita productivity 
obtains, with a large margin of average individual income over impera- 
tive individual need, explains how it may occur and does often occur 
that the volume of consumption varies, and that, through sharp restric- 
tion of consumption, industry is subjected to periodic reverses and to 
the periodic wastes, insolvencies, and starvations which bad times 
connote. 

We seem, then, to have come safely thus far : that, from the social 
point of view, saving should neither go to the extent of subtracting 
from present consumption more in utility than is added by the later 
increase of output, nor so far as to increase the later product to the 
extent that the later consuming disposition will not absorb it ; the 
limits of rational saving are, then, set by the prospective elasticity of 
consumption. 

But now, precisely where, if anywhere, does this leave us with 
regard to the problem of luxurious consumption for those times when 



DYNAMICS OF VALUE AND DISTRIBUTION 531 

centage ratio of time discount, or in a higher capitalized 
value with an unchanged rate of discount? 

Such reply as may be given is neither precisely to the 

the general attitude is one of overabstinence, — of overemphasis, that is, 
upon future consumption as against present consumption ? 

If in prosperous times the consumption of the rich displaces, in 
the main, only their own later consumption, it must be still clearer 
that any expansion of consumption in times of depression cannot be 
at the expense of the consumption of others. And obviously, if the 
luxury of the rich employs productive energies that otherwise would 
not function, such harm, if any, as can result to others must be found 
in the direction of influences peculiar not to luxurious but to ostenta- 
tious consumption, that is to say, not in the direction of any influence 
to restrict the absolute size of the incomes of others, but only the 
significance of those incomes. And if, in times like these, charity 
would be in any aspect justifiable, these luxurious expenditures have 
some obvious advantages over charity. 

But what in such case are the economic effects of charity? 

People who can find no work to do live somehow out of the 
actual product of industry, whether by the using-up of their own saved 
purchasing power, or by charity, or by loan. If we may assume that, 
through offered charity, their consumption is increased, and yet not 
at the expense of the consumption of others, but only with the result 
that more goods have been caused to be produced, it would appear to 
be true that the charity has meant added consumption for the 
recipients and added employment for others ; and if, with their larger 
income, these others should be minded to increase their present rate 
of consumption, this indtistrial stimulus would be passed forward 
one degree. 

The case would, then, stand as follows : by means of the substi- 
tuted consumption of the recipients, an existing claim against the 
products of others has been collected in the present and canceled, 
instead of being postponed for collection and cancellation to the future; 
and the collection has taken place at a time when society has been 
able to achieve the cancellation through the employment of productive 
energies that otherwise would have gone to waste. 

This argument, if valid — which is doubtful enough — means much 
for the methods and the times of the carrying-forward of public 
work. But even without the support of this particular argument, it 
should be fairly obvious that public improvements ought to be under- 
taken in times only of slack employment, and ought to be paid for in 
times of prosperity, rather than, as in present practice, carried on in 
prosperous times and on terms of displaced production, and paid for 
in times of depression. 

But what does the argument imply for the social advantage of 
such savings as does not express itself in the increase of the productive 
equipment of society, but instead, flows into consumption loans or 
goes to finance fiscal deficits ? Here nothing but condemnation is 
possible. Any private investment which, for any considerable period of 



532 VALUE AND DISTRIBUTION 

one effect nor to the other. The value of each and every 
instrument will be a capitalization based upon the current 
discount rate; but this discount rate will be the point at 
which all the savings in loan- fund form, the general-pur- 
chasing-power form, find a market among the various 
demands of borrowers for consumption purposes, for soci- 
ally productive purposes, and for privately acquisitive pur- 
poses. The technological demand is only a part of the 
entire demand. 

time, takes toll from social product by other title than of equivalent 
addition to that product is a socially disastrous thing. No matter 
what personal or moral justification there may seem to be, and 
as between man and man may really be, the case is, in last analysis, 
nothing but serfdom on the one side, and parasitism on the other. 



CHAPTER XXV 
THE ADJUSTMENT OF PRICE 

Such examination of the psychology of utility and of 
valuation as falls within the sphere of economics to under- 
take has already been attempted, with something over. 
(See note, p. 307.) For present purposes it suffices that 
market prices may always safely — albeit superficially — be 
reduced to a problem of adjustment between the forces of 
demand and supply. But, even so, there remain some 
aspects both of demand and supply and of the process of 
adjustment still requiring attention. 

For purposes of analysis and of exposition, the device 
of plotting demand and supply volumes into intersecting 
curves expressive, at their point of intersection, of the 
place and the method of market-price adjustment, has suffi- 
ciently demonstrated its claim to serviceability.^ It is, 

^ Oddly enough, the general adoption of the plotting methods has 
not availed to remove the old-time ambiguities connected with the 
demand and supply notions. Potential demand, or excluded demand, 
and potential, or excluded, supply, are clearly brought out in the 
plotting device, as are also the respective relations to the actual and 
the possible adjustments of price. Nevertheless, the bad logic of the 
terminology which employs the concepts of demand and of supply to 
explain price and then defines demand and supply as derivatives of 
price, still abides. Ruskin's inspirational methods touched the heart 
of the case when he wrote, "The economists mean by demand 'the 
quantity of a thing sold.' I mean by it the force of a buyer's capable 
intention to buy. In good English, a person's demand is not what he 
gets, but what he asks for." (Munera Pulveris, chap, iii, "Ad 
Valorem.") 

And so Pantaleoni : 

"When price falls, a determined scale of wants being given, more 
consumers purchase ; when, on the contrary, prices rise, fewer con- 
sumers purchase. Here we have to do with the extension or restric- 
tion of consumption in accordance with a given and determinate law 
of demand. But the extension or restriction of consumption is termed 
an extension or restriction of the demand, which gives rise to endless 
ambiguities. By the use of the graphic method these ambiguities 
are avoided. . . •. . The consumption, to speak accurately, or 

533 



534 VALUE AND DISTRIBUTION 

however, at the same time true that the uses actually 
made of curves of utility and curves of demand have been 
prolific of much loose thinking, — this, for the most part, 
because of the lack of differentiation between curves of 
individual utility and curves of group or social utility, and 
between curves of individual demand price and curves of 
group demand price. 

As referring to the individual, precisely what may 
demand or utility curves be made to express? As of any 
one time, and for any individual, it is undoubtedly pos- 
sible to construct a curve of utility for all of the various 
items of a stock of precisely similar goods ; but it is seem- 
ingly impossible, and it is certainly profitless, to attempt to 
include in the formulation more than one kind and one 
grade of goods. And with reference to any one kind and 
grade of goods, at any given point of time, a demand curve 
m terms of price is also easily possible of construction for 
the individual; and for any given point of time, a total- 
expenditure curve, expressive of the distribution of pur- 

figuratively the demand, is extended or restricted ; but it neither rises 
nor falls" (Pure Economics, Macmillan, 1898, pp. 148, 167). 

Flux also is accurate in essentials : 

"The state of demand may be really unaltered while the amount 
demanded [ ?] responds to changes of price quotations. Price change, 
in fact, leads to extension or restriction of the amount demanded, or, 
as is conimonly said, of the demand, though, this phraseology does not 
really describe the true nature of what is occurring" {op. cit,, 
p. 30). 

The following, however, are examples of the more common but 
less defensible usage : 

Seager : "The general law of demand is that it varies directly 
with changies in the intensity of wants, and inversely with changes in 

the prices that must be paid for goods When demand 

increases or decreases readily in response to price changes, it is said 
to be elastic" {op, cit., p. 66). 

Hadley : "In any given market, the supply of an article, in its 
technical sense, is the amount offered at a given price. It tends to 

increase as the price diminishes The demand for an article 

is the amount which will be taken at any given price. It tends to 

increase as the price diminishes The market price for an 

article .... is the price at which the demand is equal to the supply" 
{op. cit., p, 74). 

Fetter : "In the case of any good .... a change in its ratio 
to other goods will increase the demand" {op, cit., p. 29). 



THE ADJUSTMENT OF PRICE 535 

chasing power, in terms of some standard, among all the 
different grades and kinds of commoidities is, theoretically, 
within easy accomplishment. 

But for any group of individuals, a utility curve is, 
as we have seen, a hopeless impossibility. A group 
demand-price curve for any one kind and grade of article 
is readily attainable; and a group demand-price curve for 
commodities in general is also a possibility; but this last 
only in the sense that, as such, no curve remains, but only 
an aggregate market-price adjustment expressive of the 
price relations of all the different exchanging goods. All 
this, however, may require elaboration: 

For any one kind and grade of commodity, the indi- 
vidual curve. of falling utility per unit of commodity, as 
distinguished from a falling price-paying disposition, could 
have little or no significance as expressive of absolute utility 
magnitudes ; not that some common denominator, in units 
of pleasure, or of satisfaction, or of desirability, or of 
choice, might not exist in the individual psychology; but, 
if existent, it could hardly be expressed, and, if expressible, 
could hardly be of service. The significance of the curve 
is in the expression not of the absolute utility magnitude 
of the different items of the stock, but only of their relative 
significance. The marginal item also could become only 
vaguely quantitative in meaning, quantitative in the sense 
merely of asserting a smaller utility than that of any other 
item in the series. 

There is, therefore, no measure function anywhere 
expressed in the utility or marginal-utility analysis; the 
very fact that the series is a series, and that the law of 
satiation which it expresses implies that the items are of 
diminishing utility volume, makes each item incapable 
of serving accurately as the utility equivalent or measure of 
any other. 

Nor, as we have seen, is it, with the individual demand- 
price schedule, possible to find a measure of utility in 
money. The limit of price offer expresses merely an 



536 VALUE AND DISTRIBUTION 

equivalence in utility between the thing in prospect and 
some foregone alternative. (See page 315.) 

It follows that the total-expenditure schedule of the 
individual indicates not absolute utilities, but only what 
uses will be made of the individual's fund of purchasing 
power as against the competing claims of other desirable 
commodities. And no item of expenditure among all the 
items need be marginal in the sense of being at indifference 
between the actual direction and the alternative direction 
of purchase. The marginal unit of expenditure will be 
merely the lowest-service unit of all, without any neces- 
sary or probable implication as to the absolute size of it. 
Any attempted reduction for the individual of all the 
different commodities into one utility curve or schedule 
could, at best, be a mere repetition of the original expendi- 
ture curve. 

But it can hardly be too many times repeated that, so far 
as concerns utility schedules, we can never get beyond the 
individual. Society can have no utility curves or computa- 
tions, unless upon some heroic assumption — nevertheless 
possibly inevitable in socialism — that all men are alike, or, 
at all events, that their differences may or must be over- 
looked. As between different individuals, there can be no 
comparison of utilities either quantitatively or qualitatively. 

There may, however, be constructed for any one kind 
and grade of commodity a social or market price-demand 
curve, a curve indicative of the varying volumes of com- 
modity marketable at the different prices set in the schedule. 
But neither for the group, nor for society as a whole, nor 
for any individual within the group is the price offer 
indicative of any absolute utility magnitude.^ 

^ As forcibly illustrating this mixup between the individual utility 
curve and the individual price-offer curve, — ^between the possible indi- 
vidual utility curve and the impossible group or social utility curve, 
and between the individual demand-price curve and the group or social 
demand-price curve, Macfarlane's "graphic representation of the 
marginal-utility theory" (Value and Distribution, p. 37) is espe- 
cially worthy of citation. "The utility of successive increments of 
commodity is represented by lines at right angles to M Ac- 



THE ADJUSTMENT OF PRICE 



537 



The relations between the individual desire and the 
individual price-offer curve, and of both of these to the 
market-price-offer curve, require some further attention. 

How much of today's fund of purchasing power, 
money or credit, shall a given individual turn toward the 
acquiring of wheat? Not merely the hunger of today, but 
the foreseen hunger of later days must be taken into the 
reckoning, as must also the expected future supplies of 
wheat and the expected future command of purchasing 
power, and over against all this must be examined the same 



cording to the marginal utility theory, the value of the whole com- 
modity is determined by the utility of the last increment of supply." 
So "A U or M N represent severally the marginal utility or value 
per unit of the commodity." 




Accurately, this curve might represent the utility curve of any one 
commodity for any one individual at any given time, or it would serve 
for his price-demand curve, or for the price-demand curve of society 
as bearing upon any one commodity at any one time ; but it cannot 
serve for utility curve and price-demand curve together, whether for 
some one individual or for society. A price-demand curve differs 
from a utility curve, where this latter is possible, in that the price- 
demand curve shows the effect of the desire for other things. Thus, 
even though the utility curves of several different men could be 
identical, there would be as many different demand curves as there 
were different men, and the demand curve of any one man would vary 
with different days, even though the utility curve might conceivably 
not do so. So, when Macfarlane is going to have A U or M N repre- 
sent the marginal utility or unit value of the commodity, he is 
again confusing the possible interpretations of the diagram ; he is 
really treating the curve not as a utility curve of any sort but as a 
social demand-price curve expressive of different volumes of purchas- 
ing disposition in view of the differing individual comparisons and 
decisions as to the respective applications of purchasing power. 



538 VALUE AND DISTRIBUTION 

total of considerations as bearing upon the competing 
claims of all other directions of expenditure. That is to 
say, a purely personal system of discounting future facts 
into bases of present activity must be applied over a wide 
commodity field, before the individual can decide, in any 
given case, whether he shall buy wheat or raiment, or 
rather hold for future occasions certain items of unspe- 
cialized purchasing power. Thus today's hunger-utility 
line, if it could be drawn, and today's price-demand line, as 
it can be drawn, must both be lines of steep descent, since the 
appetite for food, and particularly for any one sort of 
food, is quickly satiated. Not so, however, when the long- 
time aspect is included in the computation. As the needs 
of days ahead, or even of weeks and months, make them- 
selves felt in thought, the price-offer line descends not at 
all so sharply; possibilities of storage, of decay, of ravages 
by vermin, as well as possibilities or probabilities on the 
side of future supplies, future needs, and future purchasing 
power, all are data in the problem. But in view of each 
man's situation and prospects, the law of satiety holds, 
and a limit comes to the purchasing disposition as reaching 
out toward wheat. This curve does not, however, find its 
lowest offer item at the point of satiation but at the point 
where some stronger pull attaches upon the purchasing 
power in hand. The items of price offer in the individual's 
wheat-demand schedule will therefore probably scatter 
themselves along at considerable intervals in the construc- 
tion of the individual's general-expenditure schedule or 
curve, this last curve serving to express the same facts 
which, from another point of view, might stand as the indi- 
vidual's money-utility curve. 

It is now to be noted that the individual's price-offer 
curve for any particular line of goods, and the individual 
expenditure schedule, are both worked out upon the assump- 
tion of a given price situation for each and every line and 
grade of commodity ; very considerable modifications, there- 
fore, in the amount of each commodity demanded, and in 



THE ADJUSTMENT OF PRICE 539 

the general distribution of purchasing power, might follow 
upon a change in the price of any single commodity. The 
action of each individual in the market is, as we have seen, 
to be regarded rather as the result of the market situa- 
tion than as the cause, though each individual activity is 
in turn to be taken as part of the entire cause. 

And out of all these individual offer dispositions, how 
construct the aggregate or social price-offer curve? This 
problem applies to only one commodity, and can refer only 
to the various amounts of this good which will be, under 
given conditions, purchased at different levels of price. 
And here again an existing medium of exchange and an 
established general level of prices are assumed. Precisely 
how, otherwise, the aggregate demand bearing upon any 
one commodity could be expressed or formulated, or even, 
for present purposes, described, is, indeed, hard to con- 
ceive; to the present writer, at least, the problem would 
seem hopeless. The solution for the individual case is 
clear enough, but is precisely of a sort that will not com- 
bine with other individual solutions in a way to render pos- 
sible of construction an aggregate barter-demand curve. 
For, as has been already pointed out, each individual desir- 
ing to barter away any part of his possessions, and failing 
to find an opportunity to exchange the particular item to be 
sold against the precise thing demanded, will barter for 
such third sort of commodity as seems to him most likely to 
serve best as an intermediate ; and it is not to this writer at 
present evident how these various lines of barter exchange 
and this multiplication of media could be made theoretically 
manageable in a market-value analysis. Seemingly each 
instance of barter would be a matter of separate bargain 
adjustment, modified only by the report of how similar 
trades were elsewhere being made, and also by each indi- 
vidual trader's opportunities and devisings as to some other 
possible roundabout method of achieving his ends. 

The social demand-price curve presents nothing like 
similarity in direction to any of the individual demand- 



540 



VALUE AND DISTRIBUTION 



price curves combining to make it. The individual price- 
offer curves of A, B, C, D, and E, say for bread, being 
assumed as respectively depicting price demands of 9, 8, 
7, 6, 5 ; 8, 7, 6, 5, 4; 7, 6, 5, 4, 3 ; 6, 5. 4, 3. 2; 5, 4, 3. 2, i, 
and as represented in plotting as lines of a 45-degree declen- 
sion, would, as an aggregate demand volume of 9, 8, 8 ; 7, 7, 
7; 6, 6, 6, 6; 5, 5, 5, 5, 5; 4, 4, 4, 4; 3> 3» 3; 2, 2; i, plot 
into a group demand curve represented as follows : 



\ 




"v 


















































^ 


\ 


\ 
























































-^ 




•\^ 






■^^ 










































'•«. 








^ 




'v 










































^* 






■'\ 




■~— 


S- 


-^ 










\^ 




































^*^ 






'v 






'^ 






N^ 
















































\^ 




'^ 




^ 












































■\ 








^ 


\ 
















































\ 




\ 





The value equation requires a supply as well as a 
demand term; but it does not require the assumption of a 
produced or of an elastic supply. To make, therefore, still 
clearer the concept of demand, and to prepare for the 
introduction of supply considerations, let there be assumed 
an existing supply, truly, but a supply fixed and limited in 
volume, in the sense that all sources of new supply are 
taken as, for the time being, closed. 

Nor is this an especially heroic assumption ; the eco- 
nomics of child-trading approximates this case; and the 
situation among the reservation Indians after a general 
issue of supplies is a still closer approximation. How would 
demand present itself under this gift-supply assumption? 
And how would values adjust themselves? 

Trading actually goes on briskly in these cases, and 
doubtless would do so, if confined entirely to barter pro- 
cesses ; but the barter problem has already been sufficiently 
considered, and, even if capable of satisfactory analysis, 
would not afford an analysis serviceable for our existing 



THE ADJUSTMENT OF PRICE 541 

money economy. There is, therefore, also to be assumed 
an existing medium of exchange, a price standard. 

Nor will it greatly advance our problem, the determi- 
nation of the demand and of the price of any one article, to 
appeal to the proposition, obviously true for certain purposes, 
that the existing volume of commodities at any time is in one 
aspect demand, and in the other aspect supply, and that 
therefore any increase in the total supply is at the same 
time an increase in the total demand. The problem in 
hand is to determine what amounts of money or of equiva- 
lent purchasing power are, under all the conditions and 
influences bearing upon the situation, at present held to be 
expended for any given commodity at its various levels of 
price — what purchasing-power demands are now extended 
toward the commodity in question. All the different holders 
of different goods, the exchange prices of which are to be 
offered against the commodity under consideration, must 
be assumed as having transferred their various commodity 
holdings into the homogeneous purchasing-power medium, 
before any one of these possessors of commodities or any 
one of these commodities can figure as data in the analysis 
of the fixation of price. Our question is, what money 
demands center upon any selected commodity; we have no 
concern with demand and supply as aggregates in relation 
to the entire market for the total of commodities. 

Each and every individual in the assumed group of five 
persons will be assumed as disposed to purchase some share 
of the assumed fixed supply, if only the price turns out to 
be low enough to attract him ; each, that is, represents 
potential demand. Individual A will take one item if the 
price fixes itself at 9; five items if the price is 5; and evi- 
dently this disposition not to give more than 5 for the 
fifth item, or more than 6 for the fourth item, etc., expresses 
a situation which must obtain some further expression, 
were we to attempt the construction of demand schedules 
for other commodities. We have, then, a schedule of dif- 
ferent purchasing dispositions at different price levels, — our 



542 VALUE AND DISTRIBUTION 

earlier schedule under a different statement; one item pur- 
chasable at price 9, three at 8, six at 7, ten at 6, fifteen at 

5, nineteen at 4, twenty-two at 3, twenty-four at 2, twenty- 
five at I. 

Does this complete our demand schedule? Suppose a 
certain number of articles to be for sale; at what level will 
the price be adjusted? Here we must obviously take 
account of two different possible assumptions, (i) that the 
holders of the comm.odity will sell at any price that they 
can get, (2) that there are refusa.1 prices. 

Upon the first assum.ption, that of a demand schedule or 
curve expressing maximum price offers of 9, 8, 8, 7, 7, 7, 

6, 6, 6, 5, 5, 5, 5, 5, etc., ten items of unreserved supply can 
be absorbed by the market only upon terms of a price as 
low as 5. 

No such result will, however, obtain under the second 
assumption; here, obviously, the outcome must be a dif- 
ferent one accordingly as different assumptions are made 
with regard to the reservation prices set by the various 
sellers. The truth is that a case falling within this second 
class is a case where the supply schedule really contains 
demand items; the seller plays two roles. If two men, one 
with a price-offer limit of 30, and other of 10, want to buy 
a certain horse, for Avhich the owner will refuse anything 
under 20, there are really three demand prices bearing 
upon the horse; the case is not that, on the part of the 
seller, of a willingness to sell at any price, in which case 
we should reckon only two demands, but is rather like that 
of an auction with an authorized bidder-in. 

If now, together with our original price-offer schedule 
of 9, 8, 8, 7, 7, 7, 6, 6, 6, 6, 5, 5, 5, 5, 5, 4, 4, 4, 3, 
3, 3, 2, 2, I, it be assumed that the ten supply items are 
offered only as subject to a reservation schedule expressing 
minimum prices of 10, 9, 8, 7, 6, 5, 4, 3, 2, i, and if also these 
reservation prices be transposed to appear as demand prices 
under the demand schedule, our problem will then present 
itself as one with an unreserved supply of ten items as over 



THE ADJUSTMENT OF PRICE 543 

against a demand schedule or curve of lo, 9, 9, 8, 8, 8, 7, 7, 7, 7, 
6, 6, 6, 6, 6, 5, 5, 5, 5, 5, 5, 4, 4, 4, 4, 4, 3, 3, 3, 3, 2, 2, 2, 
I, I. The price will then adjust itself at the point where 
the market demand will absorb ten items of supply, that is 
to say, at some price greater than 6 and not greater than 7. 

The manner of market analysis especially characteristic 
of the Austrian school has, under the name of the mar- 
ginal method, now established itself among practically all 
economists, although there remain different views enough 
as to the possible purposes which this analysis may serve. 
"In isolated exchange, exchange between one buyer and 
one seller, the price is determined somewhere between the 
subjective valuation of the commodity by the buyer as 
upper limit and the subjective valuation of the seller as 
lower limit." ^ 

^Positive Theory of Capital, p. 199. 

No one would be disposed to dissent further than to remark that 
Boehm-Bawerk has here shifted his subjective-worth concept over into a 
something derivative from the comparison of subjective worths — a 
true subjective valuation expressed in terms of price. B, the seller of 
the horse, and A, the buyer, work out the price-result by higgling. 
But it is worth while once more to urge that the case is more complex 
than it seems upon the face of it. What are these different subjective 
valuations? A is concerned not merely with the utility of the horse, 
but also with the utility of what he must let go in order to get the 
horse. B likewise has really two things in mind — the horse to be sold 
and the return therefor to be received. Evidently, there is present in 
the problem a medium of exchange, and tacitly and indirectly present 
a whole range of commodities into which the transferred medium may be 
exchanged. For ideally simple conditions, the case should be assumed 
as one in which B has only horses for sale, A only sheep, and neither 
A nor B the disposition, at the same time with the opportunity, to 
part with the property to be acquired. If, then, B's supply of horses 
is such as to make horses a burden to him, while A is equally over- 
stocked with sheep, the terms of exchange may be anything — thirty 
horses for one sheep or thirty sheep for one horse ; there are no limits 
but those of skill in bargaining. But, directly it is assumed that each 
finds in both horses and sheep a utility for himself, there comes about 
a valuation by both A and B, not, however, a valuation by B of his 
horses or by A of his sheep in terms of some unrelated marginal useful- 
ness, but a comparison by B of the marginal usefulness of his horses 
in terms of the marginal usefulness of the sheep offered, by A of the 
sheep in terms of the horses offered. That is to say, upon a basis of 
one marginal utility for each exchanger there can be no limit prices 
between which the exchange price must finally be found. Each trader 



544 VALUE AND DISTRIBUTION 

This explanation of value is based upon the assumption 
that, as the items of offer and demand become more numer- 
ous, the margin interval within which the higgling process 
may be operative is constantly reduced. A sufficiently 
minute gradation of both offer and demand is assumed — so 
near an approach to infinitesimals — as to justify the treat- 
ment of the selling-price as accurately a marginal price for 
both demand and supply. Admitting all the necessary 
attendant conditions, namely, that all the commodities are 
of equal desirability, all the competitors in the market 
simultaneously, and "that the buyers and sellers make no 
mistakes about the actual state of the market such as would 
prevent them from really pursuing their egoistic interest" * 
— assuming, in short, a perfectly frictionless market, this 
may be admitted as an accurate account, descriptively, of 
the market process; but it is another matter to assert that 
the point of adjustment expresses marginal utilities, or 
measures them, or is measured by them. As we have seen, 
two marginal utilities must be compared by each marginal 
trader — utilities must become marginal relative utilities — 
before a trader can become a marginal trader. It is still 
another matter to assert that these marginal traders are, as 
against the opposing in-pressing volumes of commodity 
and of purchasing power, the causal facts determining the 
ultimate price adjustment. It is yet even more questionable 
to assert that, while the market price coincides with the 
price limits of both marginal traders, the price is invariably 
determined by the price limit of only one — the buyer. All 
these questions really resolve themselves into the one great 
question, What are the causative forces in the market 
adjustment? 

must be concerned with two marginal utilities, and must have based 
his subjective valuation upon the outcome of this comparison. It is 
only upon these conditions that A can set his minimum offer at ten 
sheep for one horse, or B determine, as his limit, to accept five sheep 
for one horse, and the price limits be declared fixed at ten to one as 
upper limit and five to one as lower limit. 

The importance of the further assumption of an exchange medium 
and a surrounding commodity market is now sufficiently evident. To 
say that B will accept fifty dollars for his horse, and that A will, as 
limit, give sixty dollars, is to say that B prefers as against the utility 
of the horse the things which fiftj' dollars will purchase, and that, even 
as against the utility of the things that sixty dollars will purchase, A 
prefers the utility of the horse. 

* Positive Theory, p. 204. 



THE ADJUSTMENT OF PRICE 



545 



The illustration — quoted from Positive Theory — of 
isolated exchange has already received sufficient examina- 
tion. No talk of determination of price by margins or at 
margins, but only between margins, can be made for this 
case. 

Consider now the illustration of competition confined 
to the selling side. If ^ is the only buyer, with 30 as 
his price limit, and if together with B, with a minimum 
price of 10, there are other items of supply, B^ at 12, B^ 
at 15, B^ at 20, and B^ at 25, the price must be made at 
somewhere between 10 and 12 as the limit.^ 

This second case gives little support to the theory that 
the price adjustment either expresses a demand price or 
is limited in either direction by demand margins. Both 
the upper and the lower limits are fixed by offerers' prices. 

It appears, indeed, that only where, at a certain mini- 
mum of price as set by supply, the demand items out- 
number the supply items, can a demand schedule furnish 
both price limits ; but cases of this sort are presented only 
in the one-sided competition of buyers : 

"Assume now that, in addition to A-^ and A 2, three other 
buyers, A^, A^, and A^, compete for the horse, and their 
respective circumstances are such that they count the pos- 
session of the horse equivalent to 22, 25, and 28, respect- 
ively As will bid to the limit of 22, A^ to 25, 

and A^ to 28." « 

Thus at 28 Aj^ and A^ would close, so A^ must pay a 
price somwhere between 28 and 30. 



TWO-SIDED COMPETITION 

Buyers 
Ai values a horse at 30, and would buy at any price under 30 



A, 
As 
A, 
As 

A6 
Ay 

As 

A, 

A.\Q 



<( (( 

(( (< 

(< (< 

(( (< 

(( (( 

(< (( 

(( (( 



28, 

" 26, 
"24, 
"22, 
"21, 

" 20, 

" 18, 

" 17, 

" 15, 



a « 

(( <( 

ii It 

ci l( 

a It 

(( It 

II tt 

t( a 



28 
26 
24 
22 
21 
20 
18 
17 
15 



^Positive Theory, p. 201. 
« Ibid. 



546 



VALUE AND DISTRIBUTION 



Sellers 
Bi rates a horse at lo, and would sell at any price over lo 



Bs 
B, 
Bs 
Bo 
B, 



IS, 
17, 
20, 

2ii, 

25, 

26, 



II 

15 
17 

20 

25 

26 



"At any price over 20 only six horses are demanded and 
five offered The solution becomes essentially differ- 
ent when the rising bids have reached the limit of 21. At 
that price Aq is compelled to cease bidding, and there 

are now only five sellers against five buyers The 

bargain may be concluded at the price of 21." But at 
the price of 211^ "there would be a sixth possible seller in 

the form of Bg The limits within which the 

price must necessarily be determined are narrowed to 21 
and 211^.'"^ 

But meanwhile observe that, though in an isolated 
exchange, B and A get at the terms of sale by higgling, 
and though, in the case of the one seller B, in face of A^ 
and A 2, the price is fixed by the bargaining oi B with A-^^, 
it is a hazardous step to conclude that any similar pairing- 
off can obtain under the two-sided competition of the ordi- 

'' Positive Theory, pp. 203-206. 

Recasting! the problem so as to make reservation prices appear in 
the demand column, the supply schedule stands as eight items for sale 
without reservation as against offers of 10, 11, 15, 17, 17, 18, 20, 20, 
21, 21 J4, 23, 25, 25, 26, 27, 28, 30. The price outcome is, of course, 
the same as before. 

It is worthy of note that this view of supply as having also a 
demand aspect and as leaving both the upper and the lower price limits 
to be furnished from the demand schedule affords scant comfort to the 
demand school of value, since it remains true that the number of 
items in the supply schedule must determine between which limit 
pair of demands the price shall finally settle. Otherwise than by 
somehow showing that the volume of the supply schedule is itself to be 
traced back to demand forces and explained by them, the demand point 
of view fails to make out its case. 

But, in whichever manner the problems are analyzed, it is evident 
that no warrant has yet been given for asserting the paramount impor- 
tance of either demand or offer in the determination of price. Admit- 
ting that for cases where infinitesimals have excluded higgling, "we 
now see that every market price is a marginal price" {Positive 
Theory, p. 209), the existence and origin of any one determining force 
must still be held in doubt. To justify the Austrian interpretation, 
supply has yet to be resolved into demand. 



THE ADJUSTMENT OF PRICE 547 

nary market, no matter how idealized may be assumed to 
be the conditions. It can hardly be true that, in order to 
reach the price adjustment, any particular individuals 
must get together; yet our rationalized schematic narrative 
has it that the least anxious actual buyer who would pay 
22, if necessary, and the least anxious actual dealer with 
his limit of 20 — the marginal bargainers — arrange the 
price adjustment through their skill of fence in the bar- 
gaining process. They certainly need not; all that the 
perfect market assumes is that such a price be reached as 
shall leave no one having the willingness to sell below the 
price to cry his wares without a purchaser, and as shall 
leave unsupplied no purchaser who would yet take the 
commodity at any slightest fraction above the price estab- 
lished. The price which will fulfil these conditions may 
be established in no matter w^hat wise ; it is sufficient that it 
will not be disturbed. The chances are evidently thousands 
to one that the marginal traders will not get together to 
higgle, and it is by no means clear that these are the traders 
of especially marked disposition to higgle. That they are 
the most indifferent of all, in point of the volume of quasi- 
rents at stake, may not indeed fairly imply that they are the 
least interested in the particular penny or two to be con- 
tended for ; but in actual fact not the number of pennies at 
stake, but the kind of people playing for these pennies, will 
mostly determine who will do the higgling and how much 
higgling will be done. Women of the shopping and bar- 
gain-counter mania deserve especial attention in this con- 
nection. There is no sufficient reason for supposing them 
to be purchasers at or near the margin of indifference. 

And, even were it true that the traders nearest the 
margin chiefly do the higgling, their activity could be 
effective in setting the last touches to the price adjustment 
only so far as they were assumed not to be marginal. It 
is of the essence of the theory that in a perfect market 
higgling is not a force to modify the outcome ; and, even 
upon the assumption of an inter-marginal area, it could be 
only within this narrowest of limits and as putting, so to 
speak, a fine edge on the price that bargaining could avail 
to fix the terms of the exchange. Certainly, in the broad 
view, these marginal or quasi-marginal bargainers are the 
results of the price limit, and not the cause of it. The 
marginal item, whether of demand or supply, differs from 
any other item only that through it as marginal increment 



548 VALUE AND DISTRIBUTION 

a determination may schematically be made of just what 
effect it, or any other single item, has had upon the_ price 
adjustment, measurement being made from the point at 
which all the other forces in the market would otherwise 
have left the price. Not to the soldier who fires the last 
gun is the victory to be accounted, nor is the smallest boy 
who touches off a fire-cracker to be held responsible for 
the Fourth-of-July hubbub. If there is truly a marginal 
buyer, the marginal price must coincide with his valuation; 
but neither the point of adjustment nor the buyer at this 
point is the determinant of price. This buyer is the least 
forceful among all the buyers. True it is that, if he were 
not in the case, the price would have been other; but so is 
this true of all other buyers. The marginal demand is one 
among the whole number of demands, and as such has its 
part in the resulting adjustment; but it is the entire demand 
in equilibrium with the entire supply which gives this 
market adjustment. Almost as well talk of the child who 
chases the wave up and down the shingle as fixing the 
wave- front. 

For most purposes the marginal traders are observers. 
It is true that their added weight in the market may 
move the price from one margin to another, but the basis 
on which they build or to which they add is made by 
thousands of other demands in face of thousands of 
offers.® 

^ That this needs saying is evident not merely from numberless 
cases of careless statement — some of the present writer's among them 
— ^but from cases where the marginal doctrine is made the basis of 
really absurd conclusions : 

"At first sight it may appear strange that so few persons, and 
those so little conspicuous, should decide the fate of the whole market ; 
but on closer examination this will be found quite natural. If all are 
to exchange at one market price, the price must be such as to suit 
all exchanging parties ; and since naturally the price which suits the 
least capable contracting party suits, in a higher degree, all the 
more capable, it follows quite naturally that the relations of the last 
buyer whom the price must suit, or, as the case may be, the first buyer 
whom it cannot suit, afford the standard for the height of price." — 
Positive Theory, p. 213. 

"We may go a little farther, and affirm that, so far from the 
money demand proper being the regulating demand, in the adjustment 
of ratios between the precious metals and other commodities that 

money demand can hardly ever be the regulator [It] can 

hardly ever be that last margin of demand to which the last margin of 
supply is adjusted, and by which the ratio of exchange between the 
precious metals and other articles will be finally settled." — Giffen, 
The Case against Bimetallism, pp. 94, 95. 



THE ADJUSTMENT OF PRICE 549 

The fact appears to be that the , marginal method of 
analysis is of very limited application as an account of the 
concrete facts of industry, and is of even less value as a 
statement of causal sequences. As a thoroughly rational- 
ized statement of that which never remotely approaches 
the rational — as a formulation of the logic implicit in the 
market — it has, in some directions, an important function 
in economic investigation ; but it says merely that, with the 
various occasions of friction eliminated, with things differ- 
ent in degree merely, the forces and tendencies of the mar- 
ket would work out in conformity with the illustrative 
scheme. It has nothing to say as to the nature or causal 
interplay of these forces. 

This is in no sense to deny the important service of the 
marginal method, but rather to define and limit its pur- 
pose. Only by such close analysis of what is characteristic 
in marginal relations does the ready and sensitive response 
of value to market influences become intelligible, or a 
rational and detailed account of the ultimate relations of 
demand and supply to each other, and of both to market 
prices, become possible. 



Precisely as demand at any given time must include all 
the purchasing dispositions in possession of money or of 
equivalent purchasing power translated into terms of money 
— credits, deposit rights, goods appraised in terms of money 
— so the supply schedule, in whatever manner it is formu- 
lated, must allow for all the commodities for sale on any 
mone3^-price terms. As an intermediate step in the elucida- 
tion of the price problem, supply no more than demand is 
to be formulated as a derivative from the price adjustment. 

And here we may stop to question whether anything is 
really gained by distributing into the demand schedule 
the demand elements hidden in supply. Is the price adjust- 
ment thereby made either more intelligible or easier of 
manipulation ? 

Probably not; no preference is urged; it is only when, 
presently, under cost-of -production influences, the supply 
volume of any particular commodity is to be explained, or 
when an analysis is attempted of the influences by which 



55° VALUE AND DISTRIBUTION 

the volume of supply will, with passing time, be modified, 
that theoretical significance attaches to the proposed recast- 
ing of the demand and supply schedules. 

But it remains true that, speaking generally of modern 
entrepreneur production, goods when once produced are 
sold for what they will bring; which really amounts to say- 
ing that in the main the practical significance of all reserva- 
tion prices must be sought in the field of costs. 

For it now becomes necessary to attempt some account 
of the bearing of cost-of -production influences upon supply. 
All influences tending to restrict the relative output of any 
commodity express themselves in the entrepreneur compu- 
tation as cost influences of the most unquestionable sort; 
and chief among these are the value-productive opportuni- 
ties open in other lines of production. 

But, in point of fact, inasmuch as cost of production is 
purely a computation of the individual entrepreneur, there 
is hardly any limit to the influences that may bear to cancel 
or limit his production; but each such influence, by the 
very fact that it is supply-restricting, is the basis or the 
expression of a cost; whether it applies to one or to many 
or to all lines of product is irrelevant to the present pur- 
pose. No individual entrepreneur knows or cares as to 
the effect upon the relative volumes of different supplies. 
Possibly enough, the hazard or the tedium, or the ill repute, 
or the time discount, or the rent, may in other industries be 
equally as serious burdens as in the line of production 
pursued; but there is, in any event, the alternative of non- 
production. The only cost-of-production question is, then, 
what remuneration must be received to maintain the out- 
put. This remuneration must be sufficient to keep the pro- 
ducer from deserting his line of production for another 
fine, or from retiring, entirely or in part, to leisure. Thus 
the cost margin may be one of change of product or of 
restriction of product or of retirement. But, in any 
case, cost is the money statement of the necessary compen- 
sation. 



THE ADJUSTMENT OF PRICE 55 1 

Superficially viewed, there is, however, apparent force in 
the doctrine that all such burdens or expenses — if any such 
there are — as are common to all industries, could be omitted 
from cost computations, not as excluded from cost, but as 
irrelevant to relative costs ; for, after all, it is, in the broad 
view, true that cost as bearing upon value must be cost in 
the relative sense. And it must be admitted that it would 
be possible to regard entrepreneur qualities, capacities, 
conditions, and preferences as the sole variant influences 
upon cost, taken in this relative sense, were it not for the 
fact that the different industries vary greatly in their tech- 
nique in respect to the relative call for one productive 
agent or class of agents as against another. So were all 
industries alike in this respect, or, so far as the technology 
of production were concerned, were the different agents and 
instruments practicably interchangeable at their established 
price levels, so that no agent or instrument could be in 
relatively short supply, their could remain no basis for 
variations in the relative costs of commodities, other than 
through such differences as depended strictly upon dif- 
ferences in entrepreneurs. 

As the outcome of this discussion — more or less repeti- 
tious, — we arrive at a clearer view of the relation of costs 
to value and of the ultimate determinants of value as 
expressing themselves through costs. Taking entrepre- 
neurs as they are, with all their differences, and as competi- 
tively operating under given and common conditions of 
technological development, and placing these entrepre- 
neurs, with their different abilities and adaptations, over 
against the conditions of human needs and wants on the 
one side, and over against the existing supply of instru- 
ments and the actual limitations and conditions upon the 
supply of these instruments, on the other side, we have a 
full explanation for the relative volumes of products and 
for their respective market prices. Cost of production is 
merely the entrepreneur computation under which these 



552 VALUE AND DISTRIBUTION 

underlying forces and conditions exert their determinative 
influence upon the relative volumes of products. 

Cost, then, is to the entrepreneur something more than 
a return for the outlays of production, often something 
more also than a personal justification for activity as 
against idleness. The producer must in most cases also 
justify his occupation against any other line of gainful 
activity open to him. As bearing upon price, cost is, we 
repeat, nothing more than the inducement, expressed in 
money, necessary to the bringing- forth of product. The 
search for the maximum price remuneration for the pro- 
ductive energies and opportunities at one's disposal dis- 
closes what is commonly the most important element in 
cost in any particular line of production. 

Or, again, cost may be stated as the refusal price 
below which, as a margin, the advantages of some alterna- 
tive of production or of recreation will tip the scales of 
choice. Taking account, in this refusal price, of its most 
important constituent, the relative advantages of some 
other line of employment, the compensations held forth for 
the ministry to other demands, supply takes on a distinctly 
dynamic aspect; it is no longer an inert or passive fact as 
the recipient of demand, and as having the capacity to 
affect value only as it satiates demand. It has rather the 
aspect of a resistance, since it is, in large part and in the 
relative computation, almost solely the expression of 
demands in other directions. 

If it be granted that the supply schedule is equally a 
demand schedule, the futility of the contest between the 
utility school and the cost school becomes apparent. Each 
of the contestants will have to make room for the other, 
with both elements recognized as dynamic in precisely the 
same sort. Relatively speaking, however, the demand 
schedule is, doubtless, a fixed one. However fully, then, 
the primal and causal nature of demand be recognized, 
there is much to say for the view that, given man as he is, 
with his equipment of desires and tastes and habits and 



THE ADJUSTMENT OF PRICE 553 

customs, modifications in price are most profitably studied 
from the point of view of variations in the supply term. 
Diminishing relative costs now here, now there, are the 
characteristics of a progressive economy; the proximate 
causes of modifications in value are, therefore, to be found 
in those changes of productive processes which, by dimin- 
ishing the relative cost of particular commodities, expand 
their supply. A better process implies simply that per 
unit of product it is now necessary to divert a smaller 
total of productive forces from other lines of production. 
Prices fall until the rising curve of product cuts the falling 
curve of price at a new equilibrium point of compensations. 
Productive energies and the derived remunerations dis- 
tribute themselves in view of the marginal urgency of 
the different demands. But the more clearly, then, is it an 
inadequate formulation to say that the market, having 
become overstocked at the old price, the increased supply 
makes it necessary to make sale connections with wants of 
lower intensity — that the larger supply has, so to speak, 
uncovered lower levels of demand, so that the market price 
is still the marginal demand price of the newly attracted 
purchasers. Doubtless so it is, but it is equally the mar- 
ginal supply price. Neither the relative-marginal-utility- 
demand items nor the marginal-utility-supply items can be, 
either alone or in conjunction, taken as fixing value, but 
only as commensurate with value. 



CHAPTER XXVI 
DISTRIBUTION 

Fundamental to all problems of costs, and, indeed, to all 
aspects of distribution, is the problem of the fund or 
quantity of goods to be distributed. What is the dis- 
tribuendum, the group or social dividend? 

Suppose Farmer A to have succeeded during the year 
in covering his living expenses and to have added $500 to 
the value of his farm; what is his income, $500 or $1,000? 

Mr. Cannan stands for the view that within income 
must be included (i) the things enjoyed, (2) the increase 
made in personal capital, the $1,000 solution.^ Professor 
Fisher, on the contrary, insisting that income is strictly to 
be distinguished from capital — income being taken to consist 
purely of psychic services, the flow, while capital stands 
solely for the fund of possessions from which this flow 
is derived — holds that the $500 of improvement added to the 
farm is really not present income but rather the postpone- 
ment of present income, and that the increase in the value 
of the farm is merely the present worth, the capitalized 
value, of a prospective increase in income.^ 

For the purposes of the present discussion, Professor 
Fisher's view appears to be the better one; human affairs 
may, if one likes, be regarded in two aspects, on the one 
side, the appetitive side, an analysis of human desires for 
valuable services, on the other side, an investigation of the 
productive processes and the distributive forces under 
which these desires reach their more or less of satisfaction. 
Consumption is the final goal of production, psychic income 
(utility) the ultimate significance of the production-distribu- 
tion process. If by drouth or fire or murrain and before any 

^Economic Journal, Vol. VII, p. 284. 

^Ibid., pp. 534, 535- 

554 



DISTRIBUTION 555 

enjoyment had accrued, our capitalizing farmer had seen 
his improvements canceled, they could not be held to have 
furnished income, in any sense with which ultimately the 
distribution problem is concerned. 

But how about the products of the farmer's kitchen 
garden, making part of his $500 of "living" suppHes, or 
about the eggs and butter produced and consumed upon the 
farm, and, generally, about all those commodities and serv- 
ices which might have been, but were not, marketed? 

Or how about the fresh air breathed and the fine views 
commanded and the neighborhood privileges enjoyed upon 
the farm — all facts controlled and appropriated under the 
right and title of the farm ownership, and all in their share 
contributing to its command of those rental incomes, of the 
long series of which the value of the farm stands as the 
capitalized present worth ? Is it necessary that a potentially 
marketable fact pass through the market crucible, before 
this fact can stand as an item in the social distrihuendumf 

And what shall be said of the housewifely activities of 
the women folk at home, their errand-goings and slipper- 
bringings and nurselike ministrations? Are these to be 
accounted unproductive merely by the fact that they are 
not, in any usual sense, paid for? And if productive, what 
is the relation of the product to the national dividend? 
What also about the labor of the domestic servant? And 
how exclude this, without applying the same rule to the 
efforts of the actors, teachers, and preachers? Or is the 
line of distinction still this one of appearance or non- 
appearance in market exchanges? 

And, theoretically, these are far from being the most 
serious difficulties. If it be agreed that, even at the margin 
of withdrawal, work may be pleasurable, and yet be aban- 
doned at the point where the pleasure of the activity, 
plus the pleasure from the product, is outweighed by the 
advantages attaching to other pleasant work or to leisure, 
where, then, shall be drawn the line between work and 



556 VALUE AND DISTRIBUTION 

play ? Shall it be said that anything is work which is done 
with any slightest regard to the resulting product, and that 
only that is play which is done purely and solely for the 
very joy of the activity? This is probably the more com- 
mon formulation; but what is product for the purposes of 
the case in hand? If one hires someone to play the violin 
for him, the activity of the player is clearly productive; 
that is why it is paid for. And if gratuitously rendered — 
a gift of service — is the playing thereby to be regarded as 
the less a service and the less productive? And why is not 
equally productive the act of playing for oneself? Is 
the distinction purely in the fact that in this last case there 
is no external and marketable somewhat? Or is the dis- 
tinction merely one of the degree of roundaboutness of the 
path by which the service arrives? 

Surely if one spend some days in making a violin, later 
to be useid for one's self-amusement, the process of making 
must be accounted productive. Is the distinction then 
between the productive and the unproductive one of exter- 
nality of result? or of roundaboutness? If one apply him- 
self to grievous study in preparation for the making of 
violins, this must be regarded as productive effort, unless, 
indeed, the denial rest upon the fact that as yet there are 
no external results, the study being regarded rather as a 
preparation for producing than as actual production, and 
the skill rather as producer than as product, and its remun- 
eration rather as wages than as interest. 

But would it at all matter for the purpose, were the study 
a preparation not to make violins for oneself, but to play 
violins to oneself? In economic usage, it is difficult to 
call this sort of preparation work, but in any lay sense of 
the term, difficult to call it anything else. But, clearly 
enough, no product has yet manifested itself, of a sort to 
rank as a psychic income, or to function as rent or hire or 
wage with relation to the aggregate product to be dis- 
tributed. It seems, then, that not all desirable results fall 
within the dividend concept. 



DISTRIBUTION 557 

Possibly another line of approach to the problem will 
better serve. Leisure and recreation cannot altogether be 
excluded from the field of economic reasoning, since they 
rank as among the costs setting a limit to productive activ- 
ity; not merely the outlays of production, but the pains of 
production, and likewise the pleasure displacements of pro- 
duction, are facts affecting the money recompense required 
to induce production. That is to say, recreation wants are 
value-affecting influences to be taken into account in the 
computation of costs. 

All this, however, idoes not involve the inference that, 
from the market-value point of view, recreation is produc- 
tive. Recreation never looks toward marketable product, 
and is therefore irrelevant to market value, otherwise than 
in this aspect of cost. In the market-value sense, at any 
rate, it is not productive. 

But how, from the individual point of view, say, in the 
Crusoe reckoning? Shall basking in the sun be, from this 
point of view, accorded productivity, even though it be a 
productivity without activity? Plainly, the result is a satis- 
faction, a utility, a psychic income. What does it signify in 
Crusoe's economic life — his zvirthschaftlichen Lehen — 
whether or not somewhere in the process an external fact 
presents itself? The truth seems to be that basking in the 
sun and every ordinary sort of play can fall short of eco- 
nomic quality not by any test of externality, but only by the 
fact that free goods are not economic goods ; they need no 
economizing. In the economic sense, the production of 
free utilities is not production at all. So if, aside from any 
market aspect of the case, violin-making were an enjoyable 
activity — a costless process, it could not become economically 
productive by the mere fact that a desirable thing resulted 
from it, any more than the playing of the violin for self- 
amusement becomes productive by the mere fact that it 
gives amusement. No matter how greatly prized mud 
pies may possibly be when once they are made, they are not 
thereby economic goods — and this, simply because they are 



5S8 VALUE AND DISTRIBUTION 

free — costless — goods; one may have them to the limit of 
his desires, exempt from all conditions of burden. 

But again, what if the case be one where the recreation 
is really appreciated as a costly thing, as displacing some 
valuable product which, but for the overbalancing claims 
of recreation, would have been produced? In this case, 
the recreation must, it seems, be accepted as a productive 
fact ; the resulting good is no longer a free good but a good 
obtained on terms of conscious sacrifice. Many a man 
foregoes an outing, not solely as a question of the expense 
of the trip, but in part because of the attendant suspension 
of earnings. 

And surely the pleasure that, in any way, one pays for 
has a value ; it is, indeed, the essential characteristic of 
all valuable psychic income that, in some sort, it costs to 
get it. 

We conclude, then, that much that is called play, and 
much that is ignored, either as unproductive or as irrele- 
vant to market-value computations, must, in the individual 
psychology, be held to be productive, and that only such 
activities are, in the individual reckoning, unproductive as 
are, in the actual thought of the individual, held to be 
costless. 

This conclusion receives corroboration from the fact 
that where another plays the violin for your pleasure, and 
yet does it without charge, the naive common-sense would 
rank the case as neither more nor less productive than 
is one's own activity for one's own amusement. 

But to declare an activity productive, whether indi- 
vidually or socially, is not precisely to establish its product 
as an item in the social distribuemdum. Not all product is 
implicated in the distributive process ; there is much pro- 
ductivity against the result of which no competing and con- 
flicting claims on behalf of co-operating productive factors 
can attach, or, at all events, do attach, and which has no 
other relevancy to the distributive problem than is implied 



DISTRIBUTION 559 

in the fact that the production of it may have had some 
bearing to restrict the quantum of distributive goods. ^ 

Regarding, then, the social dividend as made up solely 
of products ripe for consumption, and as including not all 
of these, but only such as, either by the conditions of their 
production or by the manner of their consumption, come 
to be involved within the distributive process, we are now 
concerned to note that all consumption goods ripening to 
service within the economic process, as distinguished from 
crime, or warlike foray, or other non-market predation, 
fall to their recipients under the guise of economic income. 
But not all incomes are received by title either of inde- 
pendent production or of co-operative contribution to pro- 
duction. If we are to render any adequate account of the 
forces determining the apportionment of the social distribu- 
endum, it will be necessary to explain the actual distribution 
of purchasing power in society. This the productive- 
distributive process is adequate to do only in part. And 
productivity of income is something other and more inclu- 
sive than mere technological productivity, present or past. 
Goods for consumption are acquired through the posses- 
sion and offer of current purchasing power; and this in 
turn may have been acquired by inheritance, by gift, by 
speculation, by gambling, by stealing, as well as by title of 

^ It would be hard to decide whether the net result of this discus- 
sion is concurrence in the prevailing doctrine or divergence from it. 
So far as the present writer is aware, surprisingly small thought has 
been directed to making the social-dividend concept precise. The dis- 
cussions of Cannon, Fisher, and Fetter bearing upon the concept of 
income are both pertinent and illuminating for the purposes of the 
problem ; and yet— as it seems to this writer — the social dividend is 
something appreciably smaller than the aggregate of all individual 
incomes. Smart {The Distribution of Income, chap, xi) has discussed 
with great acuteness some aspects of the question, and concludes not 
only that the work of the housewife is productive, as it surely is, 
but that the product is to be included within the social dividend. It 
is, then, evident that the view here taken goes farther than the 
prevailing opinion in extending the notion of productiveness, at the 
same time verging toward extreme restriction in deciding what share 
of the aggregate product is to be included in the distribuendum. 



560 VALUE AND DISTRIBUTION 

having produced, or of having helped produce, a valuable 
commodity. For, in truth, not merely the distribution of 
the landed and other instrumental, income-commanding 
wealth in society, but also the distribution of general pur- 
chasing power and of rights to wield and direct the appli- 
cation of general purchasing power, are, at any moment in 
society, to be explained only by appeal to a long and com- 
plex history, a distribution resting, no doubt, in part upon 
technological value productivity, past or present, but in 
part also tracing back to bad institutions of property rights 
and inheritance, to bad taxation, to class privileges, to 
stock-exchange manipulation, political favor, legislative 
and administrative corruption, pensions, tolls, royalties, 
perquisites, patents, interest on public loans, interest on 
consumption loans, and, as well, to every sort of vested 
right in iniquity. 

And some of these mere rights of tribute come to be 
included in the production process, and to rank there 
as valuable market advantage or opportunity to such indi- 
viduals as control these rights, e. g., business blackmail, 
royalties on patents and processes, tolls, transportation 
impositions, and the like. But there being no apparent 
method of bringing this class of facts within the orderly 
sequences of economic law, we shall — perhaps — do well to 
dismiss them from our discussion, merely stopping, how- 
ever, to note that the incomes upon them — to the extent that 
these incomes are so far vested as to promise future 
revenues — are capitalized under the discount principle, are 
salable like other acquisitive goods, are wealth for all indi- 
vidual ends of gain or of social prestige, and carry with 
them the right to participate in the enjoyment of the social 
product. 

But none the less is there a distribution by right of pro- 
ductive contribution. And under this title must, among 
other things, be discussed the compensations allotted to 
human labor and human supervisory activity, as wages, 



DISTRIBUTION 5^1 

salaries, and profits, — to the owners of instrumental goods, 
as rents, and to capital-owners, as time discount upon 
wealth in its time aspect. 

But in order that the difficulty of the distribution prob- 
lem be not exaggerated or its importance disparaged, 
recourse must be had to the principle that production pre- 
cedes and conditions and limits consumption, and that 
therefore the production-distribution process logically pre- 
cedes and theoretically underlies all such other distribution 
influences as have no basis in productivity rendered, and as 
modify — even profoundly — the ultimate apportionment of 
consumption rights. Interest received upon public war 
loans is of this secondary-distribution sort; so pensions, 
sinecure salaries, subsidies, profits upon corrupt contracts, 
and not a few of the secondary effects of taxation. 

The chief theoretical difficulty in the subject is, indeed, 
to draw the line between this primary and this secondary 
distribution, and to make allowance for the mutual inter- 
actions ; for example, consumption loans, by affecting the 
supply of funds for loan in productive directions, exercise an 
influence upon the discount costs of production. Such 
taxation, also, as can be appreciated by the contributor as 
falling upon his productive process rather than upon his 
consumption, are treated by him as production costs. Taxes 
also which burden a distinct line of raw materials function 
as cost items in particular industries. And taxes which 
burden distinct lines of consumption, and thus disturb the 
relative volumes of consumption goods to be marketed, may 
superficially appear to have no further effect than to redis- 
tribute the productive energies of society, but, nevertheless, 
by modifying the relative hires of productive agencies, do 
appreciably disturb the distribution of purchasing power in 
society. Privately achieved or publicly granted monopolies 
of production, patents, process royalties, trade secrets of 
method, and any exclusive control of sources or of methods 
of supply — all command rents, and thereby affect the dis- 
tribution of purchasing power; and, on the other hand, 



562 VALUE AND DISTRIBUTION 

the opportunities and advantages paid for under the form 
of these rents hold the same relation to cost of production 
as are held by land and other instrument differentials of 
advantage; these costs, in turn, are mostly passed along 
under the guise of enhanced market prices, and are ulti- 
mately mainly a burden upon the consumers of the goods, 
whereby, again, redistributions of purchasing power are 
initiated. 

Monopolies or privileges of sale — as distinguished from 
those of production — function in this regard like taxes 
upon consumption. Transportation charges, whether justi- 
fiable or predatory, also operate like taxes, and are produc- 
tion costs or mere consumption tribute accordingly as the 
original incidence is upon production rather than upon 
consumption ; but in either case the final burden rests in 
most cases and for the most part upon consumers.* 

The broad principle for all problems of cost of produc- 
tion is, however, that any outlay or sacrifice for a differ- 
ential opportunity, whether this be a mere permit or a 
license, or be attached to the possession of some agent or 
instrument of production, is a cost. For, as we have seen, 
any production cost is merely another way of looking at 
what is, from another point of view, a distributive share in 
the product. But that all agent or instrument hires are 
costs is far from saying that they include all costs. The 
technological point of view, which sums up costs as' a total 

* From this reasoning if accepted as correct, applications of very 
considerable significance may be made to important problems in the 
theory of taxation and to the general principles upon which import 
duties should be levied. So also the merits of the competitive organi- 
zation of society should therefrom receive some illumination. But 
all this would be aside from our main purpose of realistic description 
and theoretical analysis. It must here suffice to note that such 
imperfections as, from the present point of view, are incident to the 
competitive system refer not so much to the processes and the results 
of the primary — the production — distribution, as to the political and 
property institutions under which the secondary distribution takes 
place, and to the modifications of the primary distribution due to 
reactions upon it from the secondary distribution. (See in this con- 
nection note, p. 565.) 



DISTRIBUTION 5^3 

of wages, interest, rent, and profits, is in its general accept- 
ance little short of astounding; for even if taxes, insurance, 
advertising, and like outlays may finally be traced to labor 
or capital-goods bases, — which, by the way, is not a simple 
matter with, say, taxes to pay interest on war debts — it is, at 
all events, clear that these are not outlays for labor or capital 
as technological factors in production. The tripartite, or 
any other technological classification of productive factors, 
must be especially misleading for purposes of the entrepre- 
neur-cost computation. 

And once again must it be repeated that the mere fact 
that cost-distribution shares are received through the entre- 
preneur as intermediary, does not imply either that no part 
of the entrepreneur remuneration, profit, is cost, or that 
all of it is cost. For it is precisely at this point of entre- 
preneur remunerations that costs and distributive shares 
fail of coincidence. All of the entrepreneur remuneration 
is a distributive share, but only for the marginal entrepre- 
neur, or only for the marginal items of each entrepreneur's 
production, is all of the compensation cost. All quasi-rents 
of entrepreneurship, all unnecessary or supra-minimum 
profits, are distributive shares falling outside of costs. 

But this does not mean that all occupation or instru- 
ment-employment .differentials above the next most attract- 
ive opportunity are non-cost facts wherever found. Cost 
is an entrepreneur reckoning; the entrepreneur knows 
what hire in the actual employment competition forces 
him to pay; but he cannot know, and he need not care, 
what hire in some other employment the agent or instru- 
ment might command. For competitive purposes, occupation 
differentials are non-cost facts only for those indi- 
viduals who receive the hire of them and to whom it, at 
the same time, falls to compute costs. It is the entrepre- 
neur alone whose occupation differentials fulfil both these 
requirements. The self-employed laborer — entrepreneur- 
ship at its simplest — computes his costs as the money state- 



564 VALUE AND DISTRIBUTION 

ment of his best alternative line of conduct, whether this be 
one of independent production, or of wage-earning, or of 
leisure. The employee might — ^but without any bearing 
upon market cost of production — compute for himself in 
what degree his compensation was greater than an equiva- 
lent for his pain, or greater than his wage under another 
employer, or in another industry. And so, with equal irrele- 
vancy tO' any market-value problem, might the land-owner 
compute what his rent as actually received was greater (i) 
than that which he himself could make out of the land, or 
(2) than another in the same line of production would pay, 
or (3) than some tenant in some other line of production 
would pay. Or a collectivist society could properly com- 
pute as its land cost of any given product only the dis- 
placed alternative products. But the entrepreneur must 
compute as his cost not what he would pay if he paid less, 
but what he does pay, as compelled thereto by all the facts 
of the situation. 

Land worth 100 as wheat rent but only 90 in its next 
best use would permit, for collectivist computations, only 
90 of cost; in a competitive society, this land will pay its 
owner in rent 10 more than it could command in any other 
line of production, and may, under the actual tenant, pay 
the owner i of rent more than any other tenant could or 
would pay. But since the land costs the cultivating tenant 
100 of rent, it is a 100 cost for him. 

This does not carry the cost computation to its closest 
approximation to accuracy, though even at its closest, 
something, as we have seen, must commonly be lacking to 
the entire accuracy of the productive imputation. If the 
actual renter at 100 is conscious that he could, in another 
line of production, make the land count him for 102 of 
return, the while that it is actually paying him 103 
in wheat, he must compute against its actual productivity 
of 103 a cost not of 100, the rent outlay, but of 102, the 
foregone opportunity. His cost, so far as it is a land cost, 
is in his best foregone alternative; in the case supposed, 



DISTRIBUTION 5^5 

this best alternative was not to keep his money in his 
pocket. The necessary price to induce the production of 
the wheat was not, in point of land cost, loo but 102,^ 

Were all entrepreneurs, albeit of unequal abilities, yet 
equal in equipment of wealth, credit, and instrumental goods, 
and alike in adaptation to the equipment in hand, alike also 
in relative adaptation to alternate lines of employment, 
all costs would be equal in each respective line of produc- 
tion, and no entrepreneur more marginal than any other, 
or marginal at a different output of commodity product. 
But, even so, there would be no warrant for expecting all 
profits to fall to the general wages level — if such a level 
there were — unless it were also assumed that all men were 
equally able and equally well equipped and equally disposed 
to undertake entrepreneurship. With fluid and perfect com- 
petition among unlike entrepreneurs, instrument rents and 
time discounts would be forced to so high a level that the last 
dose of expense, and each instrumental good employed 
thereunder, would be employed at a rate of remuneration 
so high as barely to leave to the entrepreneur an induce- 

" The law of costs, correctly formulated, is applicable to all things 
competitively produced, no matter how many scarcity goods may 
enter into the production process. In the accurate sense, the term 
monopoly connotes conditions of non-competition, or, in degree, of 
restricted competition. But, in any case, the law has no reference to 
the underlying influences explaining the actual cost situation ; it takes 
the situation as it is without attempt to investigate the causes. 

And even in monopoly conditions the cost law may, without undue 
violence, be made to cover the computation under which a restriction 
of output becomes advantageous. The cost law at its broadest indi- 
cates the point at which product, or added product, cancels as many 
price-measured facts as it adds to selling-price ; production ceases at 
the point at which value costs are at balance against value product. 

The monopoly computation applies this principle ; on the credit 
side of the account is computed the increment of product at the new 
level of price attendant upon its production ; to be charged against this 
are (i) the extra outlays of production, and (2) the loss in price 
suffered by the earlier items of product through the addition of the 
new items. The point of equation between the two sides of the account 
is the limit upon production. 

For cost purposes, in truth, small occasion exists for any extended 
discussion either of monopoly problems, or of the relation of corporate 



S66 VALUE AND DISTRIBUTION 

ment further to burden himself with supervision and 
further to increase the volume of his product. But still 
there would exist no warrant for asserting the equality of 
costs with the aggregate compensations of the productive 
factors, in any other sense than that competition could 
carry these compensations no higher. The distributive shares 
out of the product would be the higher for all entrepre- 
neurs, as entrepreneur ability should be scarce relatively 
to instrumental goods and to employee labor. Instrumental 
goods of different sorts would be better paid relatively to 
labor or to entrepreneur ability accordingly as they were 
respectively in limited supply. 

For it is to be remembered that, the demand for con- 
sumption good being assumed, the demand for any instru- 
mental good or agent is conditioned by the quantum of 
instrumental goods or agents adapted to co-operate with 
it and unadapted to serve as substitutes for it. Just 
as it is the limitation upon the supply of productive 
instruments and agents that makes value possible, so 

organization to the traditional theory and terminology of the science. 
However important and, indeed, overshadowing in modern business the 
phenomena of the later methods of business organization may be, not 
much interest attaches to them for purposes of value theory. Nor for 
distributive theory does great significance attach to the corporate 
aspects of business organization, excepting as these are, in practical 
affairs, associated with the monopoly feature. 

As to corporations purely and simply as such, there is little 
greater occasion for separate treatment than for partnerships. The 
theoretical aspects of the new problems presented have already been 
sufficiently summed up in an earlier examination of the bearing of 
corporate organization upon the established concepts and terminology 
of the cost-of-production problem. (See note, p. 98.) 

Monopolies also offer few difficulties of analysis so far as the 
effects are confined exclusively either within the field of primary 
distribution, the cost and value analysis, or within the field of second- 
ary distribution ; very often, however, this simplicity of effects is 
not present. 

Particularly are the activities of the operator in the field of 
"high finance" difficult to distribute between the two categories of 
market-value productivity — primary distribution — as over against 
predation or parasitism — secondary distribution. 

The activities of the lace-weaver, the bonnet-trimmer, the 
diamond-polisher, the patent-medicine manufacturer, the clown, and 



DISTRIBUTION 5^7 

it is the relatively limited supply of one class of 
productive factors that attaches to it a high remun- 
eration relatively to the co-operating factors. The ultimate 
explanation for the value of any commodity, be it repeated, 
is found, on the one side, in the demand for the commodity, 
on the other, in the fact that the supply of productive 
means is limited, whether by the absolute scarcity of these 
productive facts, or by a scarcity due to the diverting 
influences exerted by the demand for other commodities. 
And the actual level of remuneration is everywhere reached 
through the bidding of entrepreneurs for increased pro- 
ductive intermediates to be added to the productive effi- 
ciency already in hand; and the actual payment is thus 
commonly in some rude approximation to the amount 
which the successful bidder is able to pay for the purpose 
of enlarging his production complex. 

With goods present in stocks of similar items, this 
approximation is theoretically close accordingly as entre- 
preneur competition is close. Where each item of goods 

the prostitute, are, in the economic sense of the term, clearly enough 
productive ; on the other hand, the three-card-monte man, the shell- 
game man, and the gold-brick man, would be, at least by the iiaive 
intellige/nce, ranked as agencies of secondary distribution, under 
methods more or less ingenious and interesting. Somewhere near the 
line between these two extremes are to be ranked the methods most 
distinctly characteristic of high finance, at all events, most notorious 
in connection with it. 

The promoter or underwriter is in the business of producing 
stocks and bonds for the investment and the speculative markets ; the 
products are commonly of considerably greater worth than those of the 
patent-medicine vender, and, indeed, are often of the very highest 
title to market recognition. Relatively small stores of instrumental 
wealth, much good-will or franchise or monopoly, more of pros- 
pectus and gilded promise are, under the guidance of high ability and 
ingenious skill of organization, combined into a marketable commodity 
most profit-giving to the producers, commonly, truly, of moderate 
advantage to the purchasing investors, and sorely disastrous to the 
general public. All this is hard to rule out of the category of market 
productivity and of productive distribution. 

The later processes by which the market is rigged through bear 
stories and through artificially low dividends, or by declaration of 
unearned or bookkeeping dividends, may, as more or less reputable 
predation, be safely classed as entirely within the field of secondary 
distribution, (Cf. Veblen, Theory of Business Enterprise, passim.) 



568 VALUE AND DISTRIBUTION 

is sui generis, the room for higgling is appreciably more 
ample and the point of price adjustment is quite possibly 
found at considerably below what the successful bidder 
would, if necessary, have consented to pay. 

With the recognition that entrepreneurs are different 
must come the abandonment not only of the notion that 
profits can arrive, in any conceivable state of equilibrium, 
at equality, but also of the notion that, at no matter what 
point of development in technique, there can ever be any 
one best formula for the combining of the various differ- 
ent factors or classes of productive agents. There is, indeed, 
no such best combination for any one entrepreneur, except- 
ing upon the assumption of an established level and ratio of 
prices and of hires upon the different productive agents; 
with each change in these relative hires, that which was 
best becomes not best, and the production complex under- 
goes a reconstruction. And finally, with varying financial 
resources, the best combination is again a different combina- 
tion. Most men are compelled to adapt their productive 
combinations to the conditions set by their capital and their 
credit; what additions or subtractions of different factors 
are expedient depends not so much upon what would be 
advantageous if the entrepreneur could command the neces- 
sary resources, as upon what he can with reasonable caution 
attempt. 



CHAPTER XXVII 

SUMMARY OF DOCTRINE 

In the interests of economy of space, and to avoid the 
further detailed repetition of what has already been suffi- 
ciently set forth in earlier pages, the following propositions 
are presented: 

Value is a ratio of exchange between two goods, quanti- 
tatively specified. The concept of a general market value 
depends upon the assumption of an established medium of 
exchange, and finds its only expression as price. 

The primary fact in the explanation of value is the 
existence of human needs and desires. Utility as expressed 
in the existence of goods is merely the relation of adapted- 
ness of the thing or fact to the human need or desire. 
Limitation upon the supply of goods relatively to the need 
gives value. Thus value in producible goods is ultimately 
explained by human desires over against a limitation of sup- 
ply due either to the shortage of instrumental goods or to 
the irksomeness of effort or to both. 

With great esteem for good singing and with the rarity of good 
singers, the high gains of prima donnas find sufficient explanation. 

With scarce iron mines and a relatively high need for iron, a 
high value upon iron is readily explicable. 

With relatively scant equipment of land, and a high need for 
wheat, the high value of wheat land would be explained, irre- 
spective of the fact that various other uses for land further greatly 
restrict the supply of wheat land. 

Human needs and their relative intensity being assumed, 
the value-causal sequence runs from relative scarcity of 
agents to relative scarcity of products; from relative 
scarcity of products to high exchange power of products — 

569 



S70 VALUE AND DISTRIBUTION 

high value, relatively high price ; from relatively high price 
of products to relatively high remuneration of agents ; 
from relatively high remuneration of agents to relatively 
high present worth of agents. 

Under the competitive activity of various and differing 
entrepreneurs, each seeking his most advantageous line of 
activity in view of his particular situation in point of capi- 
tal, credit, ability, and preference, market supplies of prod- 
ucts are worked out in adjustment with the price demand; 
and under the competitive bidding of entrepreneurs for 
productive auxiliaries, the market values of instruments 
and agents are worked out, and the cost situation confront- 
ing each individual entrepreneur determined. 

That underlying the competitions and costs of entre- 
preneurs is a situation, a controlling complex of funda- 
mental facts, under the influence and direction and deter- 
mination of which the details of market production and of 
value adjustment take place, and with changes in which most 
commonly take place changes in the resulting market adjust- 
ment, furnishes us with the principle from the point of 
view of which must be examined the dynamics of value 
and of distribution, a group of problems having to do with 
the manner and degree of change in market adjustments 
attendant upon different probable or possible changes in the 
underlying situation. 

Neither in utility on the demand side nor in pain cost 
on the supply side can there be found a common denomina- 
tor or standard or determinant of market value, or of price 
as its money expression. The only common denominator 
of value is found in the selection of a conventional stand- 
ard for the purpose, a price commoidity. 

Neither in terms of market-value equivalence nor 
in terms of pain or cost, but only in terms of 



SUMMARY OF DOCTRINE 571 

utility equivalence is to be sought the standard of 
deferred payments. Equivalence in terms of unspecialized 
purchasing power, expressed under some conventional price 
standard, is the only resource for the case. 

The equation of demand with supply is an explanation 
for value only in the sense that the entrepreneur-cost situa- 
tion and the condition of price demand reflect and express 
the effects of the underlying and determining situation. 
Therefore both demand and supply themselves require 
analysis and explanation. 

DEMAND 

Utility, marginal utility, and subjective worth are pri- 
marily categories leading up to the explanation of the 
demand side of the value equation, as expressed in terms of 
purchasing power, and as bearing upon the price adjust- 
ment of any particular commodity. 

Marginal utility — a purely individual category and an 
absolute magnitude — is a step toward explaining subjective 
worth — a purely subjective and individual fact and an abso- 
lute feeling magnitude, the cost aspect of marginal utility. 
Two subjective worths in comparison explain price offer, or 
refusal price, this latter being merely a demand fact in 
another aspect. 

To different men, utilities, marginal utilities, and sub- 
jective worths are, as such, incapable of comparison; nor is 
it possible to give to utility, marginal utility, or subjective 
worth expression or measurement in terms of money. A 
maximum demand price expresses merely the equivalence, 
in point of subjective worth, of the thing bid for and the 
thing otherwise to be obtained through the purchasing 
power. 

COST 

The emergence of value is not dependent upon cost-of- 
production influences as a prerequisite, but only upon there 



572 VALUE AND DISTRIBUTION 

being a supply limited relatively to human desires. But so 
far as the cost-of -production investigation bears to explain 
the relative volumes of supply of different commodities, it 
bears to explain the values of these commodities. 

For competitive purposes, cost of production is purely 
a computation of the individual entrepreneur; for any item 
or quantum of product, it is the price statement of the 
compensation necessary to the forthcoming of that product. 

Outlay costs to the entrepreneur are distributive shares 
to the recipients; the distributive share of the entrepreneur 
also — his profit — is cost, to the extent that it is necessary 
profit. 

But the distribution that takes place under the production 
process and as part and parcel of it, is not the only distributive 
process in society. Such incomes as are received otherwise than by 
title of separate or co-operative productivity, find their explanation 
in those other social facts and forces which distribute purchasing 
power in society. 

All productive-distributive compensations come by the 
same and equal title of contribution to value productivity; 
but they are the market value of the value contribution 
rather than the accurate equivalent of the value productive- 
ness; this last varies for each instrument with each entre- 
preneur, and is nowhere precisely ascertainable by any. 

Only relative costs of production have to do with the 
exchange relations of goods. 

All influences making to increase the indemnity-price 
total which a commodity must afford to its producer if it is 
to be produced, rank, under the price denominator, as 
costs ; chief among these influences is commonly opportunity 
cost — demand in another direction functioning as resist- 
ance in the given direction. 



SUMMARY OF DOCTRINE 573 

The resistance attractiveness of recreation or of rest may also 
be included within the opportunity-cost concept if interpreted 
broadly. Instrument and agent costs are often accurately to be 
reckoned as costs only in this opportunity aspect. 

As a cost concept capital is neither technological nor 
social in significance; it stands for the total invested fund 
of value, inclusive of all instrument values, and of all 
general purchasing power devoted to the gain-seeking en- 
terprise; it is an acquisitive category. 

For competitive purposes, the capital concept should be 
formulated in the individual, private, and competitive 
sense. It should include all things, facts, or rights having 
value so that to them abstinence — the postponement of con- 
sumption — applies. Capital in this sense is a private fund 
of wealth expressed under the price denominator and 
viewed in the time aspect. The market value of any basis 
of income is the present worth of its entire series of 
putative incomes. 

Market time — discount — interest in the accurate and ulti- 
mate sense — is the premium, expressed as a rate per cent, 
per unit of time, which any fact, as present purchasing 
power expressed in terms of the conventional standard, 
commands over future purchasing power likewise expressed. 

The surplus in any instrument hire over upkeep or 
depreciation is a market time-discount fact; expressed as a 
ratio between the value of the instrument and the hire, it 
is interest in the accurate sense. 

All costs are merely sacrifices of production reduced to 
terms of the price denominator. Costs, then, include, 
among other items, all necessary indemnities for capital 
outlays in production, and a time-discount charge upon the 
capital fund invested. 



574 VALUE A'ND DISTRIBUTION 

But the cost to the individual entrepreneur is not a funda- 
mental explanation of anything; it assumes values upon instrumental 
facts as a step toward value explanation. Nor does the aggregate 
activity of entrepreneurs explain the cost conditions facing each, 
unless and until the great underlying facts of human wants and 
capacities, and of instrumental equipment and opportunity are in- 
cluded in the survey. 

Static-value analysis takes as definitive and ultimate the actually 
existing total situation, inclusive of human needs and productive 
powers, and with all the existing supplies and existing limitations 
of equipment and opportunity, and all this irrespective of how far 
the situation is due to an original bounty or to an original inade- 
quacy, and irrespective of whether human activity has in the past 
added or subtracted relevant elements, aspects, or facts. Not the 
outlays for productive facts, or these same outlays regarded as 
incomes, but the scarcity of these productive facts relatively to the 
human need, is responsible for the emergence of scarcity of prod- 
ucts anywhere and for the relative scarcity of products which under- 
lies and explains exchange relations. 

But the inadequacy of the general equipment does not explain 
the market values of any particular line of products, that is to say, 
the exchange relations beween different classes of goods. Inside the 
general situation of inadequacy of productive factors must be worked 
out the relative inadequacy of productive equipments for the various 
lines of commodities, in view of the relative strength of the pur- 
chasing power disposable in these various commodity directions. 
Here enter the influences of various different lines of production to 
restrict the supplies of productive factors in each particular line of 
industry. 

All rent outlays, whether for land or for other instru- 
mental goods, and all wage outlays and all discount charges 
upon the capital fund employed in production are equally to 
be included within costs of production as an intermediate 
explanation of the supply side of the value equation. 

Nowhere is the distinction between price-determining and price- 
determined costs valid. In the main, the value of each productive 
fact is value-determined; but as part of the supply of productive 
facts, each is, through its products, in its small measure, a value- 
affecting influence. So also each individual activity bearing upon 
price or related to price, whether, on the one hand, of production or 
of sale offer, or, on the other hand, of price offer or of price 
refusal, is, in the main, price-determined, because chosen in view 



SUMMARY OF DOCTRINE 575 

of the actual price situation and in adaptation to this situation; but 
each such activity, as aflfecting in its own small measure the aggre- 
gate of supply or of demand, must thereby and pro tanto act as a 
price-determining influence. 

The only one of the several rent concepts important to 
the cost analysis is that of the actual hire; but as oppor- 
tunity cost, the land or any other productive fact may 
figure as cost at something vaguely more than the actual 
hire paid. 

Costs to the entrepreneur are mostly but not entirely 
traceable (i) to value serviceability to entrepreneurs in 
other lines of production, or (2) to value serviceability to 
entrepreneurs in the same line of production, or (3) to 
alternative value possibilities of the productive facts, 
inclusive of the entrepreneur's ov\rn productive power, when 
under his own employment. But pain and weariness and 
displaced recreation have also their place in fixing the total 
remuneration necessary to the forthcoming of product. 

All margins are ultimately personal and not instru- 
ment margins. Instruments are marginal only with refer- 
ence to the entrepreneur and relatively to him and to his 
situation; marginality is a psychological attitude with 
reference to productive activity or to the productive employ- 
ment of instruments. 

Marginal instruments are variously understood to indicate (i) 
valueless instruments, a market-value standing, not inconsistent with 
the rendering of services for which the user would, if necessary, 
pay an appreciable hire; (2) instruments having neither market- 
value nor personal-value significance; (3) instruments which at the 
actual market charge are just barely worth employing by the actual 
employer. 

Number one is a concept derivative from the relationships of 
instrumental goods to entrepreneur activity, but not necessarily giv- 
ing a precise expression to any one of these relationships. Numbers 
two and three are meaningless excepting in terms of relativity to 
entrepreneur activity. Marginality is, in last analysis, an entre- 
preneur attitude with relation to one's own productive activity or to 
the productive efficiency of agents and instruments. 



INDEX 



Abstinence: Carver on, 225, n. See 
Cost of Production; Interest; Cap- 
ital. 

Abstract Capital, 170-74. See 
Capital. 

Austrian School: terminology 
criticized, 308-11. See Boehm- 
Bawerk; Wieser; Utility, Cost and 
Utility, Subjective Value. 

Average Man, 446, n. 



Bagehot, Walter: cited, 166, n. 

Banking: Essential nature of, 231, 
n., 255, n. 

Boehm-Bawerk, Eugen v.: chaps, 
xvii, xviii, xix; explanation of in- 
terest, chap, xiv; controversy with 
Clark, 201-12; controversy with 
Dietzel, 339-51; on capital, 155, 
n., 211, 215, n.; on price adjust- 
ment, 543-48. See Interest. 

Bxtllock, C. J. : on laws of return, 
493- 

BONAR, J. : on Hedonism, 307, n. 

C 

Catrd, Edward: on Hedonism, 213, 
n. 

Cannan, Ebwin: savings vs. in- 
come, 554; on income, 559, n. 

Cairnes, J. E. : chap, vi; cost as 
life-draft, 382, n.; loan-fund capi- 
tal, 165. 

Cantillon, R.: laws of return, 492. 

Capital: chaps, x, xi, xii. 

— Is land capital ? chaps, x, xi; 50; 
socially viewed, chap, xi; competi- 
tively viewed, chap, xi; fixed and 
circulating, 170, n.; Ricardo's, 
Smith's, Senior's, James Mill's, 
J. S. Mill's, views on, 170, n.; 
productivity of, and interest, 
chaps, xiv, xv. See Factors of 
Production; Loan Fund. 



— As loan fund: chap, xii; Cairnes's 
view, 165; Ricardo's confusion, 
42; related to banking, 165-69. 
Are men capital? 154, n. 

— Various concepts: Boehm-Ba- 
werk, 15s, n.; Fetter, 147, n., 
154, n.; Fisher,_ 147, n., 157, n.; 
Smith, 149; Ricardo, 151; J. S. 
Mill, 151, n.; Tuttle, 154, n.; 
Veblen, 153; Clark, 170-74. 

— ^Wage-fund capital, 148. 

— ^Abstract capital, 170-74. 

— Competitive capital, chap. xi. 

Carver, T. N. : on abstract capital, 
172, n., 173, n.; abstinence and 
interest, 225; factors of produc- 
tion distinguished, 131, n.; on op- 
portunity cost, 383, n.; profits re- 
lated to cost, 100, n., 106, n.; wage 
determination, 518; measure of 
value, 181, n.; laws of return, 489, 
493, n.; criticism of Clark, 440, n. ; 
controversy with Hobson, 476, n. 

Charity: expenditure for, 529, n. 

Clark, J. B.: chap, xxii; abstract 
capital, 170-74; entrepreneur cap- 
ital, 479, n.; on interest — contro- 
versy withBoehm-Bawerk,2oi-i2; 
on roundaboutness, 208, n. ; doses 
of outlay, 432, 434; labor as fund, 
263; nature of rent, 397, n.; dy- 
namic forces, 480, 514. 

Commons, J. R.: laws of return, 
499. n. 

Competitive Capital. 5ee Capital. 

Consumption: productive and un- 
productive. See Productivity. 

Cost of Production: various cost 
concepts, chap, i; Adam Smith's 
doctrine, chap, ii; Ricardo's doc- 
trine, chap, iii; labor-purchase 
cost, I, 8; labor-time cost, 3; labor- 
value cost, 4; labor-pain cost, 3, 
62-83; non-competitive groups, 
71-80; labor not always painful, 
48, 82; abstinence as pain cost — 
Senior, 45; skill and cost, 75; real 



577 



578 



VALUE AND DISTRIBUTION 



costs — Marshall, 373; cost in 
Crusoe economy, 84. 

-Opportunity cost, 5, 6; Adam 
Smith's doctrine, 10-12; Ricardo's 
doctrine, 31; Senior's doctrine, 
48, 49; Austrian doctrine, 356; 
displaced utility as, 85, 347, 366; 
any displacement as, 87; alterna- 
tive use as rent, 290-5; as related 
to profit, 89-92; various views as 
to profit opportunity — Fetter 98, 
n. — Seager, 99, n. — Flux, 99, n. — 
Carver, 100, n. — Seligman, 100, n. 

-Collectivist cost, 291, 356. 

-Abstinence as cost: as to land — 
Senior, 50; capital-use cost, 5. 

-Interest as cost: J. S. MiU's ex- 
planation, 58, 59. 

-Wage-subsistence cost, 24. 

-Profit as cost, 56; only part is, 65; 
relation of profit to cost, 88; Had- 
ley's doctrine, 89; Mill's, 90; 
Walker's, 91; Fetter's, 104; Sea- 
ger's, 104; Carver's, 106; Flux's, 
106; Seligman's, 100. 

-Cost merely relative, 85, 262; com- 
parative cost — Cairnes, 64; J. S. 
Mill, 60; is opportunity cost, 60. 

-Entrepreneur cost, 10; adopted 
byj. S.Mill, 52, 56. 

-Rent and cost, chap, xvi; J. S. 
Mill's doctrine, 60; Say's 116-18; 
Ricardo's controversy with Say, 
109-13; Malthus' doctrine, 283; 
Senior's, 50, 283; Adam Smith's, 
24, 27; Ricardo's, 36, 38; Hob- 
son's, 414-35; Wieser's, 371. 

-Marginal cost, chap, xvi, 262; in- 
cludes various influences, 87, n.; 
extensive and intensive margins, 
426; price-determining vs. price- 
determined, 401, n., 425; margin- 
determining vs. margin-deter- 
mined, chap, xvi, 273. 

-Land as opportunity cost — ^J. S. 
Mill, 59, 61; views of Patten, 
Jevons, A. S. Johnson, Macfar- 
lane. Fetter, Hobson, Hyde, 290- 
95; Marshall, 385-98. 

-Relation of different factors to cost, 

135-37- 
-Risk cost, 98. 
-Utility vs. cost, 339-52. 
-Ultimate determinants — situation 

cost, 282, 283, 285, 294. 
-Skill and cost, 75. 



D 

Davenport, H. J. : Outlines of Eco- 
nomic Theory, cited, 186, n., 187, 
n.; depressions, 228, n.; normal 
price, 279 n.; normal value, 481, 
n.; rent, 523, n. 

Deferiied Payments. See Standard 
of Deferred Payments. 

Demand: curves, chap, xxv.; de- 
fined, 532, n. 

DiETZEL, Heinrich: criticized by 
Hobson, 409; controversy with 
Boehm-Bawerk, 339-51. 

Diminishing Return. See Return. 

Distribution: chap, xxvi; by 
value productivity, chap, xxii, 360 
364- 

Doses: of outlay, 427; size of, 
478, n.; views of Hobson and Car- 
ver, 476, n. See Rent. 

Dynamics: of value and distribu- 
tion, chap. xxiv. 

E 

Effective Utility. See Marginal 
UtiUty. 

Entrepreneur Capital. See Capi- 
tal. 

Expenses of Production: ex- 
penses vs. costs, 273, 383, n. See 
Cost of Production. 



Factors of Production: a techno- 
logical classification, 126-35, 128, 
n.; Carver's view, 131, n.; Sen- 
ior's view, 137, n. See Land; 
Labor; Capital; Cost of Produc- 
tion. 

Fetter, F. A.: definition of de- 
mand, 532, n.; interest theory, 
208, n., 212; roundaboutness, 
207; income, 559, n.; profits re- 
lated to cost, 98, n., 104, n.; ex- 
pense cost and opportunity cost, 
383, n.; utiHty and marginal util- 
ity, 315, n.; laws of return, 497, n. 
See Capital. 

Fisher, Irving: on income, 559, n.; 
savings vs. income, 554; interest 
theory, 242, n. See Capital. 

FiTE, Warner: on Hedonism, 
308, n. 



INDEX 



579 



Flux, A. W. : definition of demand, 
532, n.; profits related to cost, 99, 
n.; 106, n.; expense cost and 
opportunity cost, 383, n.; laws of 
return, 496, n. 

F'ONDING of productive factors, 263. 

Forced Gains, 422, 426; Hobson 
on, 405, n. 

G 

Galiani, F., 107, 231, n., 233. 
GiDE, Charles : on laws of return, 

496, n. 
GiTFEN, Robert: determination of 

value, 548, n. 
GONNER, E. C. K., 30. 
Green, D. I., 93. 

H 

Hadley, a. T.: definition of de- 
mand, 532, n.; profits related to 
cost, 89. 

Hedonism, 48, n., 303-10. 

HoBSON, J. A.: chap, xxi; forced 
gains, 405, n.; rent and cost, 414- 
35; displaced rent and cost, 290; 
controversy with Carver, 476, n.; 
savings, 529, n.; utility and value, 

Hollander, J. : rent and cost, 290; 

intensive margin, 266. 
Hyde, A. M. : rent and cost, 290. 
Hyndman, H. M. : labor measure of 

value, 177, n. 

I 

Increasing Return. See Returns. 

Income: vs. capital, 554. 

Interest: chaps, xiv, xv; defined, 
188; problem stated, 190-93; pro- 
ductivity theory, chap, xiv; as 
cost; see cost of production; risk, 
95; roundaboutness, 207; Boehm- 
Bawerk on, 194; Fisher, 242, n.; 
Ricardo's difficulty, 36-41; Veb- 
len as to relation to credit, 255, n. 

J- 

Jevons, W. S.: relation to eco- 
nomic doctrine, 334, n.; on utility, 
316, n.; definition of wealth, 314, 
n.; displaced rent and cost, 290; 
subsistence goods as capital, 209. 



Johnson, A. S.: displaced rent as 

cost, 290. 
Johnson, J. F.: on loan capital, 

174, n. 



Labor: as cost: ^ee Cost of Produc- 
tion; as fund, 263, 459; produc- 
tive and unproductive: see Pro- 
ductivity; as cost denominator, 15, 
25, 118; as cost determinant, 15; 
as standard of deferred payments, 
15; real value of, 11; as real price, 
8, 11; value proportioned to — 
Ricardo, chap, iii, Cairnes, chap, 
vi. See Factors of Production. 

Lamarck, J. B. P. A., 308, n. 

Land: as capital: see Capital; as 
funded, 263, 414, 419, 422; up- 
keep, 435; incidence of tax on, 
248, n. See Factors of Produc- 
tion; Rent. 

Laughlin, J. L.: measurement of 
value, 181, n. 

Laws of Return. See Returns. 

Loan Fund: Ricardo on, 160. See 
Capital. 

Luxury, 529, n. 

M 

Macfarlane, C. W. : utility and de- 
mand curves, 536, n.; forced gains 
405, n.; Walker's definition of 
profit, 400; rent of labor, 400, n.; 
labor as fund, 263, n.; interest, 
206, n. 

Mackenzie, J. : on Hedonism, 307, n. 

McCuLLOCH, J. R.: interest as cost, 
37> 40. 

Malthus, T. R. : laws of return, 
chap, xxiii; doctrine of cost, 283; 
on general glut, 218, n., 231, n.; 
labor as cost measure and deter- 
minant, 118, n.; rent and cost, 55, 
n., 56, n.; cost doctrine criticized 
by Senior, 48, n. 

Margins: extensive and intensive: 
see Cost of Production; personal 
or instrumental, 424, chap, xvi; 
in price fixation, 405; nature of 
land margin, 286; cause or result, 
375; various kinds, 87, n., 378, n. 



58o 



VALUE AND DISTRIBUTION 



Marginal Utility: chap, xvii; as 
value determinant, chap. xxii. 

Marshall, Alfred: chap, xx; 
measurement of utility by price, 
372; on Jevons, 337, n.; displaced 
rent as cost, 290; margins and 
cost, 273; long-time reckoning, 
480; criticized by Hobson, 409. 

Marx, Karl: on money, 238; labor 
measure of value, 177, n.; labor as 
fund, 263. 

Menger, Anton: relation to eco- 
nomic doctrine, 334; definition of 
subjective value, 327; principle of 
imputation, 360; capitalization, 
208, n. 

Mercantilists: value doctrine, 107; 
notion of productivity; see Pro- 
ductivity. 

Mill, James: interest as cost, 37, 
39-41; general glut — controversy, 
with Malthus, 118, n., 231, n. 
See Capital, fixed and circulating. 

Mill, John Stuart: chap, v; 
cost, chap, xvi; marginal cost and 
relative cost, 262; profit related to 
cost, 90; displaced rent as cost, 
290. See Capital; Productivity. 

Money: its place in value theory, 
217-20; function in deferred pay- 
ments, 217-20. See Price. 

Monopoly: cost in, 565, n. 
N 

Non-competitive Groups, 71-80. 
O 

Opportxtnity Cost. See Cost of 
Production. 

Ostentation: in industrial depres- 
sions, 529, n. See Luxury. 

Outlay Cost. See Cost of Produc- 
tion; Entrepreneur Cost. 

Overproduction, 227, n.; possi- 
bility of, 231, n.; in industrial de- 
pressions, 231, n. 

P 

Pain Cost. See Cost of Production. 

Panics: depression following, 231, n. 

Pantaleoni, Matfeo: relation to 
economic doctrine, 338, n.; defini- 
tion of demand, 532, n.; Hedon- 



ism, 310, n., 311 n., on Galiani, 
233. n. 

Patten, Simon: recreation cost, 48, 
n.; displaced rent and cost, 290. 

Physiocrats: cost theory, 107. See 
Productivity. 

Pierson, N. G. : on cost, 268, n. 

Pleasure. See Utility. 

Population: redistribution of, 486; 
and wages, 519. See Subsistence. 

Price: defined, 218; adjustment of, 
chap, xxv; peculiarities in theory 
of, 238, n.; normal, 279, n.; rent 
and price. See Rent. 

Production: what is, 555. See 
Factors of Production. 

Productivity: defined, 121-24; 
productive labor, 122, n.; produc- 
tive consumption, 122, n.; Mer- 
cantilist notion, 122, n.; Physio- 
cratic notion, 122, n.; funded, 460; 
distribution by, 285; interest ac- 
cording to, chap. xiv. See Fac- 
tors of Production. 

Profits: as cost; only part are cost, 
65; necessary or minimum, 90; 
net or competitive, 102, n.; rela- 
tion to cost, 89-91; Hadley's view, 
89; J. S. Mill's, 58, 90; Walker's, 
91; risk profit, 96-98. See Cost 
of Production. 

Promotion: profits of, 557, n. 

Q 

Quantity Theory, 241, n. 

Quasi-Rents: and costs, 395-98, 
401, n. 

QuESNAY, Francois : laws of re- 
turn, 492. 

R 

Rent: various concepts, 370, 419, 
n.; causes of — Malthus, Ricardo, 
Senior, 283, 284; on labor, 399; 
affected by improved technique, 
523, n.; incidence of tax on, 248, 
n.; as cost: see Cost of Produc- 
tion. 

Representative Firm, 374, n. 

Return, Laws of, chap, xxiii. 

Ricardo, David: chap, iii; pain 
cost, 3; controversy with Say on 
cost, 109-13; riches vs. value, 3; 



INDEX 



581 



cause of rent, 283. See Rent; 

Cost of Production; Capital, fixed, 

circulating, and Loan Fund. 
Robertson, J. M. : on saving, 5 29, n. 
RoxTNDABOUTNESS. See Interest. 
RusKiN, John: on saving, 529, n.; 

definition of demand, 532, n. 



Savings: as loan fund, chap, xiii; 
"fallacy of," 529, n.; market for, 
in prosperity and in depression, 
231, n.; howfar desirable, 221-25; 
upkeep, 435, n. See Capital; In- 
terest; Abstinence. 

Say, J. B.: chap, ix; on capitaliza- 
tion, 208, n.; controversy with 
Ricardo on cost, 109-13; loi de 
debouchees, 238, n. 

Seager, H. R. : expenses and oppor- 
tunity cost, 383, n.; profit related 
to cost, 99, n., 104, n.; on Hedon- 
ism, 309, n.; definition of demand, 
532, n.; laws of return, 495, n. 

Seligman, E. R. A.: social-organ- 
ism doctrine, 443, n.; expenses 
andopportunitycost,383,n.; profit 
related to cost, 100, n., 103, n.; 
displaced rent and cost, 292, n.; 
on Hedonism, 309, n.; utiHty and 
marginal utility confused, 315, n.; 
laws of return, 496, n. 

Senior, W. N. : chap, iv; definition 
of wealth, 314, n.; abstinence as 
pain cost, 45; opportunity cost, 
48; causesof rent, 284, n.; utihty, 
317, n. See Capital; Factors of 
Production. 

Sevs^all, H. R., 107. 

Sedgwick, H., 225, n. 

Single Tax, 248, n. 

Skill: related to cost, 75. 

Smith, Adam: chap, ii; various cost 
doctrines, 2; capital concept, 148; 
rent and cost, 27. See Capital. 

Social Dividend: defined, 121, 
chap. xxvi. 

Social Organism: chap, xxii, 441, 
n., 458. 

Standard of Deferred Payments : 
chap, xiii; labor, utility, or value, 
15-18, chap. xiii. 



Standard of Living, 518, 529, n. 
Subjective Exchange Value, 330. 
Subjective Value: chap. xvii. 
Subjective Worth, 347; a cost 

concept, 354. 5ee Subjective Value. 
Subsistence: relation to wages, 

435> ^-'t goods as capital, 208-10. 
Supply: defined, 532, n.; curves of, 

chap. XXV. 



Taxation: incidence of, on land 
and rent, 248, n. 

Thackeray, W. M., 300, n. 

Transferability, 314, n. 

Transportation: an agricultural 
process, 486; effect of improve- 
ments on rent, 523, n.; chap. xxiv. 

Turcot, A. R. J., 107. 

Tuttle, C. a.: capital concept, 
154. n- 

U 

Underconsumption. See Overpro- 
duction. 

Upkeep: of land and of labor, 435. 
See Interest. 

Utility: displaced as cost; see Cost 
of Production, Opportunity Cost; 
curves of, chap, xxv; intrinsic or 
extrinsic, 317, n.; absolute and 
relative, 3 1 7, n. ; relative marginal , 
299; comparabihty, 300, 302-14; 
vs. cost, 339-51. See Marginal 
UtiHty; Subjective Value; Cost 
of Production. 



Value: real and exchange, 31, 34; 
vs. riches, 33; can it be measured ? 
177, 178, 181, n.; views of social- 
ists, 177, n.; Marx's, 177, n., 181, 
n.; LaughHn's, 181, n.; Carver's, 
181, n.; Walsh's, 188, n.; natural 
value, 358. See Subjective Value; 
Price. 

Veblen, T. B.: profits and time, 97, 
n. ; credit related to price, interest, 
and profit, 255, n.; profits of pro- 
motion, 567, n.; saving, 529, n. 



582 VALUE AND DISTRIBUTION 

W Whittaker, a. C. : on Adam Smith, 

Wages: subsistence minimum, 435, 23, 25, n.; Malthus, 56, n.; Ri- 

n. See Labor; Cost of Produc- cardo, 34, n.; MiU, 59, n.; Semor, 

tion; Subsistence. 5 2) n. 

Walker, Francis: profit related to Wieser, Friedrich, v.: chaps. 

cost, 91; marginal cost, 265; rent ^vu, xix; mterest, 199, 2ooj capi- 

of labor, 400. tahzation, 208, n.; pnnciple of 

„r T 1 ^- ^ imputation, ^60-62; demand for 

Walras, Leon: relation to eco- productive goods, 512. 

nomic doctrme, 334, n. /^ j r °, I 

Walsh, C. M. : standard of deferred ^ork: defined, 556. 

payments, 188, n. Z 

Wealth: defined, 314, n. Zones of Indifference, 472. 

Weissmann, a., 308, n. Zxjckerkandl, R., 339, 341. 



Jl'L 



04 



